I’ve never been that great of a poker player, but I enjoy playing because of the mental aspect of it all. Each hand, each pot, each table are new and while the general rules are the same the betting is qualitative.
In trading, if you do it right, part of it is qualitative and part of it is quantitative.
Most, who were never trained in long/short portfolio management and only day-trading concepts (vwap/head and shoulders/bull flags/levels) really never see it from this perspective.
In their minds, everything focuses on expectancy: “If I back test this and get the results to say this then this must lead to this” - is the thought process. There’s a lot of people like that and in my career, I’ve had people hit me up with back-tested systems all the time to sell or to try to invest into.
I never liked them. And for that matter, I never liked a fully quantitative approach either because it effectively says you don’t know how to think and handle stress - in my view.
Poker has rules and probabilities but there’s also the other side of it: reading the player, chip stacks, the table at large and the situation - that’s qualitative.
Most of trading, as I see it, in long/short equities is qualitative. Each situation you get into is different.
How you structure the trade, the size of the trade, the overall portfolio construction matters case-by-case, year by year.
So, let’s explore that with some insights from Poker legend Phil Ivey.
Most of poker is bluffing – at least how I see it.
Now if you asked my younger brother (also a finance guy) this he might disagree, he spent a few years exclusively playing and is really good. He can tell you the percentages, the odds of each hand and betting structures he has are quantified around that to some respect.
I’m not that good but there’s a correlation to betting and bankroll/risk management that portfolio management has with poker.
The past 3/4 months I’ve been playing weekly back in Phoenix with a group that goes to my cigar lounge. Most are regular players paying 2-3 times a week and I can tell as I’ve played with them who the gamblers are, the bullshitters and who know what they’re doing. That part of the game to me is interesting: reading others and putting scenarios together is fun.
I don’t know the percentage of winning hands or how to bet accordingly (at a basic level sure) but I know how I play and how that relates to my personality.
I like “sure bets” where I can push in heavy into the table and lock in a win. Trips, potential flushes, full house – those plays I prefer and usually wait to play.
It’s interesting because when you get an A/K or A/Q hand, in my experience, it rarely pans out. You might nail the AA but there is always some other better hand lurking.
That alone always has me cautious to go “all in” and that is the same way I treat running my PA (personal accounts) and fund. No one trade/position size ever breaks a pre-defined risk threshold no matter “how much of a lock” it is because at the end of the day you never know.
There’s plenty of assholes in trading and poker that take the oppositive mentality and lose money like it’s going out of business and while I might be an asshole, I’d prefer to be one that makes money, not lose it.
Whenever I get an A+ setup or situation in the market I want to press it to max risk but that situation, can’t just be defined as this must be a “1:5 R/R” trade - it had to be looked at as its own situation and assessed - a qualitative approach.
Charles Schwab in 2023 was an example of that.
There is a difference in trade setups (repeatable for the most part) and investments, not repeatable. And there are differences in the risk that go into certain trades/situations all based off of various factors - a qualitative approach.
Separating that, is key.
Most, at least amateur day traders, just don’t do that because they don’t see the markets or investing from Portfolio Management lens. Whether that is a positive or negative is subjective but there is a nuanced discussion in that.
When you play poker, and watching this Ivey Masterclass, you could see that he had his own qualitative analysis as well. Hand by hand, player by player, situation by situation.
If you watch the Masterclass, you’ll see - the guy is a legend.
A few years ago, on a flight to Puerto Rico I watched his Masterclass.
It was everything I expected and there were ALOT takeaways from it to help me think about my investing better but here are two that I actually took scratch-pad notes on.
Extract the most out of your hands when you have it.
Double check your hand so you read it right.
Those were the two that stuck with me.
Extracting the Most out of a Portfolio
The first one especially. Extracting the maximum out of a trade is key and that means knowing when to push it.
I personally believe in a structured long/short portfolio of 5-10 positions (this varies on your capital stack - goes higher or lower).
Some of those positions are smaller risk, some are full portfolio risk — meaning whatever your max size is for a full conviction position that it is sized to that.
Ideally, that produces risk-adjusted returns (taught in the FOPT Training), so you’re not forced to have to look at each and every trade/market scenario as “Do I push it here or do I go small?”
You put together a mix of long/short ideas to do that.
What I’ve noticed in both poker and investing is that there are 1-2 big hands/ideas that really build your chips/bankroll. The rest from there becomes small wins/losses until the next big hand/idea comes along.
If you play poker, then maybe that resonates. Most of this is grinding it out then you get 2-3 big ideas maybe once a quarter or once a month if you’re lucky.
So, when I say I’m not a ‘bluffer’ like others I’ve played against I mean it. I want sure bets when playing but I’ll take small risk hands here and there to test the water.
The same with trading and that statement from a slide in the FOPT above.
If you take the time to construct a portfolio (even with DITM calls/puts like we do in the AST Swing Portfolio) then you have risk allocated and don’t have cash sitting.
You can’t do that in poker. You have to sit in a chip stack and wait to bet or go-all in, so there is a difference there.
But the point from his Masterclass was to extract the most out of each hand. Take that and think of it as extracting the most out of your portfolio/bankroll.
BUT - do that without being the standard retail NPC going all in or 50% of your account on a day trade all the while biting your nails.
The second thing he said in that Masterclass that resonated was this….
Double checking your hand so you read it right.
He was explaining in his Masterclass (and showed the game film of it) where he had won this hand. It came to the river-card, the other guy showed, Phil looks, and mucks/folds his hand – he actually had THE WINNING hand, but he mentally thought he had something else.
One, I’ve done that too many times where I forgot to sell or put the wrong structure on or just plain forgot to do something.
There have also been times where something seems so obvious in a situation that I’ll go back and check it 5x’s – just to see if I missed it or if I need to see it differently.
There are times where I’ve been a complete bozo and NOT done this and here’s an example of it:
In 2014 I was a PM at this L/S shop (hedge fund) and it was a bit of a slow year, so I had an index futures book so as to generate P&L for the fund (again putting capital to work while other ideas were working).
Well, at that time I had also had a huge, short thesis on Netflix and took a sizeable, short – about $2mm notional.
That week ES futures we’re moving, and I was so occupied with that when I was checking the book for other positions glanced at my NFLX 0.00%↑ short – it was up sizeable, so I cut bait on 75% or so of it.
But completely forgetting earnings were after the close.
That above is what happened to the stock: one of their biggest misses ever.
I left near $1.7mm-$2.1mm on the table.
So, when he talked about leaving (I think it was close to an $500K+ hand) on the table I related instantly.
Always check your work and then check it again then do it again.
I don’t care if that means if it’s a position in the book that is winning you want to go back and check soft targets to make sure you’re prepared to book gains, so you don’t forget.
We use a top-down approach to trading the markets so there is a process to how it works, almost like a checklist, but it’s qualitative. You can read about it here if you are a premium member.
The point is, you want to always double check your work, especially if you’re a long/short equities trader because there is always something that you might miss and if you’re anything like most traders you rush through things.
Conclusion
The similarities between playing poker and investing/trading the markets are incredibly similar and I would suggest that any of you who do this or are wanting to do this spend the $15/$20 (or whatever it is) on that Phil Ivey Masterclass.
One, you get to watch a master of his craft talk about part of his framework and thought process for basically nothing.
Two, you might connect some of what he says to risk/portfolio management which is way more than any trading book is going to do.
Enjoy that watch.
Dan
Love all the cross connections I also love poker