Monday, December 28, 2009

Aaaah Snap....

In finance they have a saying, "you're either quick or you're dead."

In poker, the winner usually has some combination of favorable luck and excellent snap judgment ability.

Snap judgments are also critical in countless other tasks - Gladwell practically wrote a whole book about it. Yet, in life, people call me "judgemental" or say that I "generalize" as if it's a bad thing.


People generalize, because their generalizations are generally correct. Why are snap judgments about life (and people) a bad thing, when it's a critical skill set to almost everything else you do?

Saturday, December 19, 2009

Holiday Season

Just finished a wonderful 8 nights of Channukah with Jess and my folks. Lot of oily latkes and cheesy gifts. While I asked my folks not to get me anything this year, my parents bought me an Enervive machine after Mom saw an infomercial on HSN. The purchase reflects many aspects of my life. My parents are very loving, and even if they know I'm not really looking for anything (other than free time) my family still likes to try new and silly things. The Enervive is a battery powered machine with two paddles you place on a tense part of your body (lower back) that sends electric pulses that cause you muscles to involuntarily spasm, yet relax at the same time. Needless to say, after several glasses of wine, we we're all laughing around the table thinking about this goofy contraption and pretending like you could hook it up to your head to turn on electrical appliances. It was fun, and I'm glad Jess understands how my family works and is also eager to join it.

So while Jess and I are enjoying the holiday cheer,(it's hard not to given that the winter flavors at starbucks are back), recently I've been wondering as I look to extended family and colleagues, why can the holiday season bring out the worst in people? While I don't have a grand thesis on it, I think the heart of the issue comes from the idea of spending money you don't have on gifts that may not be appreciated.

But then again, I think back to the enervive, and while fortunately my parents can afford a silly toy and I don't think that my Mom meant for it be appreciated as a party gag, maybe the real issue is that gift giving forces people together. And you if can't appreciate your family and friends, it doesn't matter what toys you find under the Christmas tree this year.

Saturday, December 05, 2009

Poker, Investing and Market Follow Up

1. One of the many parallels between poker and investing is the rhythm in betting. For example, in poker I'm constantly adjusting my style to the position, or where I sit relative to the dealer. For example, if I'm first to bet, I'm less likely to play aggressively given that I'm uncertain on how the other players feel about their cards. In short, it's foolish to make a strong bluff, when any one of the nine players ahead of you could have stellar cards. That's the point of playing position, you're constantly monitoring the flow of information from other players. Maybe Mr. Alligator Blood quickly called the bet from the drunken roommate, so maybe I shouldn't raise pre-flop.

In investing, similar to knowing your position in poker, you must know where you are relative to the general market. The more bullish the crowd, the more bearish get. It is for this reason that after a 60% rally, I don't go "guns blazing" into any investment. I currently sit with a 5% short on the market, 5% long Berkshire, and 90% cash.

Another similarity between poker and investing is the discovery process of the fulcrum security. For example, during a contentious bankruptcy usually there's a valuation fight where creditors argue for how much debt the underlying company can support. This is a critical process because it frequently determines which lender gets the post-reorganization equity, and which lender gets nothing. The lower you are in the company's debt structure, the less likely you get a pay day.

In poker, I like to think of the fulcrum security as the minimum bet necessary to cause the other players around the table to question what they have with the goal of having them fold. What's fun about this is that it's a constantly evolving discovery process. While usually I think the fulcrum bet is somewhere between 5 to 10% of the initial buy-in, it can vary based on how long the game has been playing, the amount of alcohol consumed, the familiarity of the players and countless other factors.

Anywho, those are just my random musings on cards vs. investing, and that said there are many differences between the two that need to be appreciated and will be discussed in the future. Until then one of may favorite quotes that captures the difference is from a recent Bloomberg article: “In poker, people are used to not sitting back and waiting for the fat pitch...they’re used to skirting the edge of ruin and they learn the tools of how to do that.”

2. To follow up on my last post on shorting the market, I've settled on not betting. While I have strong conviction that we are due for a near-term pull-back, the risk return profile (like pot-odds) totally isn't worth it. For example, how much can I profit from betting against the market? In all likelihood the range is from 10-30%. Given that I almost never buy stocks with only a 30% upside, why should I make an exception for shorting the market? The answer is that I shouldn't. Despite the frustration of sitting on the sidelines (much like the frustration of mucking a lot of bad hands), a full chip stack is worth a lot more when everyone else is panicking.

Thursday, December 03, 2009

Leaving Money on the Table

I'm very very tempted to quadruple my short position on the Russell 2000 almost purely on my read of the tape. While I think the U.S. markets have topped, betting on their fluctuations is more of a parlor game employing speculative dark arts versus the analytical operations I wish to continue conducting as a value investor (buying great companies on the cheap).