"The Greatest Investment Book Ever Written"

[Guest hellsten]

The Brooklyn Investor on similarities between poker and investing:

http://brooklyninvestor.blogspot.com/2013/05/greatest-investment-book-ever-written.html

 

My best results in investing have come from courage and playing aggressively (or that's what I like to think), so I agree fully with the Brooklyn Investor.

 

Quite a few on this board are poker players, so it would be interesting to hear what you think about similarities between poker and investing.

 

I like the questions mentioned at the end:

Am I playing too tight? 

Too loose? 

Am I being aggressive enough? 

Am I really a solid player or just tight? 

Or am I being timid?

 

"Am I being aggressive enough?" is something I ask myself quite often when I think I've identified a good bargain.

[prunes]

In the same vein of books unrelated to investing being applied to the field, Victor Niederhoffer made all his employees read Secrets of Professional Turf Betting.

[claphands22]

In the same vein of books unrelated to investing being applied to the field, Victor Niederhoffer made all his employees read Secrets of Professional Turf Betting.

 

Interesting book, here is a good Amazon review and a link to a copy that is public domain.

 

-----

By Mark Mills

Chapter 1. Always bet against the public. Betting at a racetrack is a zero sum game from which the track takes a significant chunk of the wagers before anyone gets paid. Further, the people who know the horses best and can easily fix the race, the owners and trainers, are betting against you. At best, only a minority can ever win. The track requires the majority to lose, therefore avoid the majority play. Only bet when two situations occur simultaneously: 1) you have well considered odds in your favor. 2) The public is betting your choice is a loser. Put the two together, and be sure to have 3-1 or better odds in your favor. In other words, always think in terms of probabilities.

 

Chapter 2. Things are easier now since the 'action' is more liquid and public opinion based on weak authorities.

 

Chapter 3. Keep up to date on new angles: read what the professional reads.

 

Chapter 4. The public doesn't lose their fair share. Statistically, they should only have 10% losses. Instead, many lose everything they bring to the track. They do this by allowing emotion to switch their betting style from one race to the next, and always switch at the wrong time. If they just picked 'position 6' every time, they would only lose 10%, but they bet little when they should bet much, and much when they shouldn't bet at all. It is the 'switches' that pull money from the public. Having 'guts' means sticking with your strategy in the face of losses. You can count on the public being unable to demonstrate guts.

 

Chapter 5. Ever changing cycles: The game will only last as long as people see enough winners to convince them they have a chance. If the 'true' odds become obvious, no one would play. Therefore, there must always be long shot winners and ceaseless change in the strategies of the winners. Early in the season, the public badly assesses the odds, the pros bet them and win. Late in the season, the public loads up on the good horses, but this reduces the odds, so the long shots get undervalued and provide the winning odds.

 

Chapter 6-7. Be aware the owners and trainers need not always focus on winning. Know what motivates the owner of the horse to enter the race. Are they building a reputation? Trying to win purses? Trying to turn the public against the horse, then win as a long shot? Understand the rules constraining owners and trainers. Know the claiming rules. Know how to read the weight reports.

 

Chapter 8: Sum the odds. The odds are reported as 3-1, 4-1, etc, so it isn't obvious that the sum should be 100. Convert the odds to percentages and sum the list. If the sum of each horse's chance of winning is less than 100, bet on every horse and you are sure to win. If you are sure a favorite won't win, you can create a sure win by betting on everything else (less than 100 sum). The track is sure to make money if the sum is over 100.

 

Chapter 9: Make your own price lines (100% books) and test them every day (paper workouts)

 

Chapter 10: Pittsburgh Phil's system: buy the stuff that no one wants. It takes guts to stick with the system. It killed Pittsburgh Phil at 52. It takes guts, that is why it doesn't matter if everyone knows the system. Guts isn't the ability to ignore fear, it is the ability to stick to your original goal, process and strategy. (!!!!)

 

Chapter 11: Money management: the obvious, don't spend your living expenses, but also, the important thing is your emotional balance. Without balance, you switch and that is how to lose.

 

Chapter 12: you cannot grind, you must speculate. You can't chisel, you must gamble. Accept and expect more losers than winners.

 

Chapter 13-15: Reading the racing publications

 

The rest of the book is a detailed plan for seasonal betting, January through December, one chapter per month.

 

While reading, I speculated on how to apply this to the securities markets. What is a 'race', a day of trading? In terms of stocks, what are 'claiming races'? What are weights?

 

The notion of 'ever changing cycles' is really interesting. The 'racing game' is clearly a product of some evolutionary process that weeded out less robust 'betting markets'. By looking at the 'game' as a whole, one can see it as an activity perfectly designed, but having no designer. Most will lose, but still find it enjoyable enough to continue the playing. Further, it is impossible to investigate unemotionally, since the attraction perpetuating the games existence is entirely emotional. The opacity is central to the game's survival.

-----

 

http://masteroftheuniverse.wordpress.com/2010/05/11/flotsam-and-jetsam-part-v/ posted a scanned copy of the book -- the scan is really rough.

 

http://www.videosfinder.com/stocks/books/SecretsOfProfessionlTurfBetting.pdf

 

 

 

 

[Guest hellsten]

In the same vein of books unrelated to investing being applied to the field, Victor Niederhoffer made all his employees read Secrets of Professional Turf Betting.

 

Thank you. Very interesting book.

 

Chapter 1. Always bet against the public. Betting at a racetrack is a zero sum game from which the track takes a significant chunk of the wagers before anyone gets paid. Further, the people who know the horses best and can easily fix the race, the owners and trainers, are betting against you. At best, only a minority can ever win. The track requires the majority to lose, therefore avoid the majority play. Only bet when two situations occur simultaneously: 1) you have well considered odds in your favor. 2) The public is betting your choice is a loser. Put the two together, and be sure to have 3-1 or better odds in your favor. In other words, always think in terms of probabilities.

 

I like situations where "the public is betting your choice is a loser" combined with an owner-operated business.

 

Chapter 6-7. Be aware the owners and trainers need not always focus on winning. Know what motivates the owner of the horse to enter the race. Are they building a reputation? Trying to win purses? Trying to turn the public against the horse, then win as a long shot? Understand the rules constraining owners and trainers. Know the claiming rules. Know how to read the weight reports.

 

Lots of things that apply to investing comes to mind. Money managers only need to collect the fees to win. Great business owners know that they don't need to win in the short run, they are in the game for the long run (e.g. Eddie Lampert).

 

Chapter 10: Pittsburgh Phil's system: buy the stuff that no one wants. It takes guts to stick with the system. It killed Pittsburgh Phil at 52. It takes guts, that is why it doesn't matter if everyone knows the system. Guts isn't the ability to ignore fear, it is the ability to stick to your original goal, process and strategy. (!!!!)

 

Sounds like the type of value investing e.g. Bruce Berkowitz and Francis Chou does. Warren Buffett doesn't need guts to invest anymore, he knows money is flowing in almost regardless of what he does. Warren doesn't have to explain anything to investors like Berkowitz and Chou, but that's maybe because people know he's almost always right.

 

"thinking about chips as units and not as money" is something I think helps a lot too:

Brunson also suggests thinking about chips as units and not as money.  This is so very true in trading and investing too.  If you think about money as money, then it may impact the way you invest.  If you think of a loss as real money, it might upset you.  For example, if a stock tanked and you lost money on it, it's easy to think, "gee, I could've bought a Porsche with that money...".  Or if a loss is thought of as next month's rent, you won't be able to focus on the process; you will be distracted by the reality of the money.

[jay21]

The first two things that I thought of that investing and poker have in common are:

 

1. Bank roll/risk management - I don't have any statistics to prove this but I would say that most people lose a lot in poker because of poor bankroll management.  You have to know how to size your bets, what stakes you can afford to play, etc.  Usually people have poor bankroll management because they want to get rich quick or are addicted to the thrill of gambling.  In investing, you see people trying to swing for homeruns, using leverage, and overextending themselves.  If you eliminate these mistakes, you probably won't ever lose big in either.  In poker, it's a little easier to determine bet sizing, but it is much harder in investing because your edge is less quantifiable.  Some topics may still be applicable such as the Kelly Criterion, but it isn't as obvious to me how to apply bet sizing to investing.  Two basic ideas of bet sizing are transferable:  1. Bet big when you have a large edge (bigger than your intuition tells you) 2. Never risk having your net worth go to zero.

 

2. Being process, rather than result, oriented - Some of the best poker players push every edge they have (meaning a greater than 50% chance of winning).  This means that they probably lose a lot of hands (some of which are worth a ton).  It can be hard (especially for amateurs) to realize even though they lost the hand, they made a correct decision that on average would result in a profit.  Therefore, focusing the process and decision making is what's important.  This is directly transferable to investing.  You should constantly focus on ensuring that your process and decision making is sound.  The results can take awhile to materialize and every tick and price gyration is not meaningful and does not prove if your thesis is correct. 

 

[alwaysinvert]

As a former professional poker player I tend to think that the analogies between poker and investing often are a bit farfetched. Ignoring differences to stress similarities, like trying to fit a square plug into a round hole. I did like the blog post, though, and it made me think of analogies I hadn't quite considered.

 

My key takeaway from playing poker  that's highly applicable to investingr, however, is thinking of the counterfactual - what didn't happen but could have. I think even some seasoned value investors don't do this enough. Granted, it's harder in investing than in poker because it's much less calculable.

 

I also want to add that while Super System may be a good book for getting a biography on a successful poker player and some insights on psychology, it's HUGELY outdated on the strategy side. This book was written before game theory entered the sphere of poker and some of the stuff in it on strategy is horrendous advice in today's game.

 

While some poker players become good investors (like Charlie Munger), I don't think most do. All successful poker players have the handicapper's mindset, but only a few have patience - most are the exact opposite and crave action. That's why they were attracted to poker in the first place.

[blainehodder]

Any up to date poker books you recommend Alwaysinvert?

[alwaysinvert]

Any up to date poker books you recommend Alwaysinvert?

Well, depends on what you are looking for. There are many horrible books that were written during the boom years to make a quick buck and even though they are much newer than Super System, they are not better. Mathematics of poker (Chen) and The theory of poker (Sklansky) are books that are more helpful in understanding the structure of the game, but just like with investing there's only so much a book can do in terms of helping your game. You need to have a hands-on approach to poker, thinking and calculating for yourself. And playing loads, obviously.

 

The right framework is game theory, because it gives you a holistic view of the game, but to be able to use it properly you need to be properly ensconced in the game of choice. I can draw pretty good conclusions on the spot in no-limit texas from a game theory approach (non-borderline ones, at least - and much more is borderline than you think), but in 2-7 triple draw or fixed-limit omaha 8,  I am almost as helpless as a complete amateur - because my knowledge of those particular games is very constricted.

[jay21]

I would recommend Harrington's books and also the forum 2plus2 which has a plethora of great posts.  I am surprised how many successful poker players are willing to discuss strategy on that site.

[Kiltacular]

Great thread.  Great posts.

 

Excellent summary from clapshands.

 

I like the point about the counter-factual from alwaysinvert.

 

 

[Guest valueInv]

Any up to date poker books you recommend Alwaysinvert?

Well, depends on what you are looking for. There are many horrible books that were written during the boom years to make a quick buck and even though they are much newer than Super System, they are not better. Mathematics of poker (Chen) and The theory of poker (Sklansky) are books that are more helpful in understanding the structure of the game, but just like with investing there's only so much a book can do in terms of helping your game. You need to have a hands-on approach to poker, thinking and calculating for yourself. And playing loads, obviously.

 

The right framework is game theory, because it gives you a holistic view of the game, but to be able to use it properly you need to be properly ensconced in the game of choice. I can draw pretty good conclusions on the spot in no-limit texas from a game theory approach (non-borderline ones, at least - and much more is borderline than you think), but in 2-7 triple draw or fixed-limit omaha 8,  I am almost as helpless as a complete amateur - because my knowledge of those particular games is very constricted.

 

What is a good book on game theory that would be useful for investing?

[alwaysinvert]

Any up to date poker books you recommend Alwaysinvert?

Well, depends on what you are looking for. There are many horrible books that were written during the boom years to make a quick buck and even though they are much newer than Super System, they are not better. Mathematics of poker (Chen) and The theory of poker (Sklansky) are books that are more helpful in understanding the structure of the game, but just like with investing there's only so much a book can do in terms of helping your game. You need to have a hands-on approach to poker, thinking and calculating for yourself. And playing loads, obviously.

 

The right framework is game theory, because it gives you a holistic view of the game, but to be able to use it properly you need to be properly ensconced in the game of choice. I can draw pretty good conclusions on the spot in no-limit texas from a game theory approach (non-borderline ones, at least - and much more is borderline than you think), but in 2-7 triple draw or fixed-limit omaha 8,  I am almost as helpless as a complete amateur - because my knowledge of those particular games is very constricted.

 

What is a good book on game theory that would be useful for investing?

Idk, something by Edward Thorp maybe? Haven't read anything by him, though. The Signal and the Noise touches on some game theory and bayesian thinking and is a good read in my view. I quite liked The Success Equation, too, and even though it doesn't explicitly discuss game theory, it has some good stuff on a basic level about luck and correlation/causation, which may seem bland to some people but that I think is actually pretty deep and crucial.

 

I've been told that Bruce Bueno de Mesquita has some great stuff too but I haven't read any books by him either.

 

Of course, game theory only really works in closed systems with known variables. I'm not sure if there is a "Game Theory in Investing"-book out there. But maybe some smart guy should write it.

 

Be aware that I don't really know game theory as in know the actual math behind it or anything. I just use it as a model to see if I can work out what's exploitable and what is not on a rough basis. In poker, that translates to looking at what kind of moves that would be clear dogs if playing against an optimal opponent (as opposed to trying to take advantage of a specific real-life opponent using a "read" based on a certain sample size, an approach that is far more open to biases - but if done right of course way more profitable). That can pretty often be done using high school maths.

[Guest hellsten]

In the same vein of books unrelated to investing being applied to the field, Victor Niederhoffer made all his employees read Secrets of Professional Turf Betting.

 

Just stumbled on this video featuring Victor Niederhoffer.

 

"Victor Niederhoffer after he lost everything in the 1997 Asian Crisis"

http://www.youtube.com/watch?v=860Rd2BD74U

 

Interesting speculator:

In short, a combined sequence of events huge declines in individual Thai stocks,losses in the Thai currency and the closing of the U.S. stock market and extensive up moves in the prices of options the fund was short; all came together in one day, in a short and disastrous coincidence. The loss, over and above profits made and withdrawals from the fund, totaled approximately $50 million. In addition to the losses in the funds, Victor had invested heavily in his own trading. To cover his debts and living expenses, after much soul-searching, he took out a mortgage on his house at an interest rate of 18% a year and sold his liquid assets, including his entire silver collection and his holdings in private and publicly held companies. He started again from the bottom. He scraped together a small trading stake and started plying his trade, slowly building back what was lost, determined never ever to allow the same mistake to happen twice. In a true example of the human spirit and his will to be a champion again, he is back in the game at a top level.

http://www.dailyspeculations.com/vic/goodboy_interview.html

 

A couple of years later…

On April 6, 2006, the industry group MarHedge awarded [8] Matador Fund Ltd. and Manchester Trading, two funds managed by Niederhoffer, the prize for best performance by a Commodity Trading Advisor (CTA) in the two years 2004 and 2005.

However, Niederhoffer's funds were caught up in the 2007 financial turbulence and credit crunch, and the Matador Fund was closed in September 2007 after a decline in value of more than seventy-five percent.

http://en.wikipedia.org/wiki/Victor_Niederhoffer

[ilike]

I played poker semi professionally while at University and most of my investment stake is from that period. As Alwaysinvert wrote I think the analogy is somewhat overused but a few concepts I like to think are similar are,

 

- Second and third level thinking, and when it its useful

 

In poker against very weak players you only play your cards, with weak players second level thinking is important, with good players third level thinking is important and with really good players it is all game theory.

 

Investing it somewhat similar. For markets with little competition valuation is everything, with strong competition second level thinking gets more important and with really strong competition it is probably not much that can be done to get an edge other than to accept that you can't get an edge.

 

 

- Using you opponents psychological pain as an opportunity

 

Especially in tournament poker situations arise when weaker players get scared and do not want to take risks after putting in a long time at the tables. A good player takes advantage of this bluffing into situations and forcing players to commit or fold. Similar things happens in cash games were situations were a player might look like an idiot for calling are nice bluffing opportunities.

 

The investing version of this is buying things that are to painful to hold or that institutions will look like idiots for having.

 

 

- and the most important one, shun competition

It is much more profitable to be an average player playing bad players that to be a good player playing average ones. This is similar to what Buffet says about when a good management team meets a bad business the reputation of the business stays intact.

 

 

 

 

[Guest valueInv]

Any up to date poker books you recommend Alwaysinvert?

Well, depends on what you are looking for. There are many horrible books that were written during the boom years to make a quick buck and even though they are much newer than Super System, they are not better. Mathematics of poker (Chen) and The theory of poker (Sklansky) are books that are more helpful in understanding the structure of the game, but just like with investing there's only so much a book can do in terms of helping your game. You need to have a hands-on approach to poker, thinking and calculating for yourself. And playing loads, obviously.

 

The right framework is game theory, because it gives you a holistic view of the game, but to be able to use it properly you need to be properly ensconced in the game of choice. I can draw pretty good conclusions on the spot in no-limit texas from a game theory approach (non-borderline ones, at least - and much more is borderline than you think), but in 2-7 triple draw or fixed-limit omaha 8,  I am almost as helpless as a complete amateur - because my knowledge of those particular games is very constricted.

 

What is a good book on game theory that would be useful for investing?

Idk, something by Edward Thorp maybe? Haven't read anything by him, though. The Signal and the Noise touches on some game theory and bayesian thinking and is a good read in my view. I quite liked The Success Equation, too, and even though it doesn't explicitly discuss game theory, it has some good stuff on a basic level about luck and correlation/causation, which may seem bland to some people but that I think is actually pretty deep and crucial.

 

I've been told that Bruce Bueno de Mesquita has some great stuff too but I haven't read any books by him either.

 

Of course, game theory only really works in closed systems with known variables. I'm not sure if there is a "Game Theory in Investing"-book out there. But maybe some smart guy should write it.

 

Be aware that I don't really know game theory as in know the actual math behind it or anything. I just use it as a model to see if I can work out what's exploitable and what is not on a rough basis. In poker, that translates to looking at what kind of moves that would be clear dogs if playing against an optimal opponent (as opposed to trying to take advantage of a specific real-life opponent using a "read" based on a certain sample size, an approach that is far more open to biases - but if done right of course way more profitable). That can pretty often be done using high school maths.

 

Thanks!

[prunes]

I won't endorse Niederhoffer as an investor. I will however endorse his book Practical Speculation. You guys will have to ignore the slam he makes about Ben Graham ;)

 

Practical Speculation is great though because he stresses the importance of actually testing ideas with empirical evidence. Unfortunately for him, I would guess that the reason he went bust two times is because of his over reliance on historical data and being unprepared for fatter tails than previously observed ala what Taleb warns of.

[Gamecock-YT]

In the same vein of books unrelated to investing being applied to the field, Victor Niederhoffer made all his employees read Secrets of Professional Turf Betting.

 

I went through the first 13 1/2 chapters over the weekend, it really is an excellent book. I can see why he made his employee read it. Overlay = margin of safety. I think it was Munger that said, “We look for a horse with one chance in two of winning and which pays you three to one." That's exactly what this book teaches.

[west]

In the same vein of books unrelated to investing being applied to the field, Victor Niederhoffer made all his employees read Secrets of Professional Turf Betting.

 

I went through the first 13 1/2 chapters over the weekend, it really is an excellent book. I can see why he made his employee read it. Overlay = margin of safety. I think it was Munger that said, “We look for a horse with one chance in two of winning and which pays you three to one." That's exactly what this book teaches.

 

+1 on this being a great book.  Bottom of page 19 to page 20 is especially great.  I can see how someone can gain psychological experience through betting on horse racing relatively quickly, and then parlay this experience into better psychological control when investing.

[G2]

Unfortunately for [Niederhoffer], I would guess that the reason he went bust two times is because of his over reliance on historical data and being unprepared for fatter tails than previously observed ala what Taleb warns of.

 

Malcolm Gladwell did a wonderful piece in the New Yorker which contrasted Taleb and Niederhoffer back in 2002: http://www.gladwell.com/pdf/blowingup.pdf

[crackspread]

Investing and poker principles can also be related to sports betting. All the principles are still there...solid money management keys to success, having an "edge" and betting big if so, if odds and probablities are in your favour and the public takes the opposite opinion, it is probably a good bet.  I've made a few bets in my time that worked out very well by simply ignoring the public opinion, betting big when I thought I had an edge or better knowledge, and probably a little luck. I don't bet with large sums of money and it is only for fun, but I am a huge boxing fan, so it definitely makes the fights more enjoyable. Something I've noticed with boxing and the UFC is that the marketing machines behind these two sports grossly influence the public. The public usually sways the odds tremendously and for the most part, is very dumb money. I remember a few years ago when the odds were 2-1  come fight time Mayweather v Hatton, when Mayweather is the vastly superior fighter, but obviously the british fans were putting it all down on their favorite fighter Hatton. The fight ended with a brutal Mayweather KO of Hatton. Another recent fight I noticed was between Price and Thompson when it is well known among non-casual boxing fans that Thompson is the vastly superior fighter but was a 3 to 1 underdog, even after KOing Price last fight.