Wednesday, April 06, 2005

Inevitable, not immediate

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You just shorted that stock. Your research showed the flaws in their model, reality will catch up with them.

The stock does not know you bought it. Their model may have been flawed for a long time. The stock may go up for quite some time yet.

You just raised preflop with your pocket Kings hoping to isolate the two maniacs that have played almost every hand. You flop your set and get one fish to raise, your re-raise all in makes you heads up against the worst fish, again.

You know the end to the story. His pocket 45 offsuit makes a straight on the river.

It is inevitable that stock will tank, sometime. It is inevitable that the maniac will lose all his chips. What is not inevitable is that it will happen now, inevitable is not necessarily immediate. Just 'cause you are there does not change reality.

This is the basis for money management. In investments you use stop losses and small commitments to any correlated investments. In poker, you play at limits that will allow you to survive if you run into a huge string of bad beats. In both you "get smaller" when your bank roll is shrinking, if you want to survive.

The temptation is to play too big so you can win back what is lost. What they call standing at the rail is true of both disciplines. Play too big and you may end up just watching the action.

You can't win if you don't play.

You can't play if you run out of chips.

inevitable does not imply immediate.

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