Thursday, March 31, 2005

Gamble or gambol?


Gamble: To take a risk in the hope of gaining an advantage or a benefit

Gambol: To leap about playfully; frolic

Invest: To commit (money or capital) in order to gain a financial return

Why do you play the market or poker? If it is for fun, a gambol, tis best if stakes are small.

If it is the first or last definition, the emphasis is on commit and risk. People will "invest their life savings on a stock they heard about on a street corner. Others will invest their entire poker bankroll on a move they saw a pro do on television.

The point is: if it is important enough to deserve a significant amount of your capitol; it is worth knowing what you are doing. Read 8 Steps to Financial Freedom, and take notes. Yeppers, you will disagree with some of it, but knowledge has value.

Pay the price. Buy the book before the investment or the game. If there is to be value in your actions they must be directed.

Ready, Fire, Aim, is not useful tactic.

There are several good poker tools on the Charity Shill poker page.

Once you have the knowledge, be sure to acquire experience as inexpensively as possible.


Sunday, March 27, 2005

Cure your blind mind


Made you look.

Back to reality. Here is a quote from the opinion page at Junior Partner;

"All people very strongly interpret evidence as supportive of what they believe, or want to believe. Just look at politics. All people also strongly downplay or ignore evidence contrary to their beliefs. An open mind is an elusive delight."

Psychological tests have been made, I forget the exact statistics, but around 85% of a persons response to an article can be projected just by knowing their political affiliation. When shown a made up article and facts about Iran, the researchers knew in advance, with high probability, if a person would believe it or doubt it by knowing if the person were Democrat or Republican.

Finance and poker? Ah yes.

In Finance there are massive belief systems that permeate investor's decision process. Now oil is important, the trade deficit is not. The twenty year run of the stock market to 2000 makes people even now believe stocks always go up. If you pick up a "how to make a million" book from the past, you will find them watching the front page of the news for information we ignore today. Reality is not the fad that media is quoting, it is the overall action and inter-relationships that form the backdrop to the news. That make me a fundamentalist investor long term. Short term the little squiggles caused by myopic investors determine entry and exit points.

In poker there are belief systems, equally poorly developed, that guide most of the inexperienced. Using pot odds on the flop in a no limit game with no reference to the implied odds of stack size is one example. Those who lack understanding of poker theory for the specific game they are in, are bringing a knife to a gun fight.

Listen to what people complain about in poker and investments, that is an indicator of what is important now. Use a broader view of reality to gain advantage.

Wednesday, March 23, 2005


How can you tell when that gut feeling is something worth following?

You sit down at a limit table, put out a bet and are immediately raised. You think the raiser may be bluffing, but what action do you take?

The first rule of intuition: To follow a gut feeling you must know it's source. If you have never played with the raiser before, are new to this poker room, and don't know any other players, that gut feeling is probably the pizza you just ate.

If you know this poker room is full of aggressive players, you know a couple of the rounders at the table, and you've played in hundreds of hands with the raiser before, maybe you should honor the gut feeling and re-raise.

Track your gut feelings, your responses, and the results in your journal. You may find you win a big pot a third of the time you follow that hunch, and lose a few bets the other two thirds. Your hunches may be winners; against people you know, in surroundings that are familiar.

There are hundreds of things surrounding you right now, but you only notice a few of them at a time. Your sub-conscious notes everything, but only calls attention to those things that you have decided are important. Gut feelings can be a summation of many sub-conscious data points that trigger an alarm loud enough for your conscious mind to pick up the sound.

Maybe someday we will talk about training your sub-conscious, telling it what to bring to your attention. For now realize if you can decipher the source of your gut feeling, it may be worth acting on. Track it to check your results.

This is true at the poker table, and also in the investment markets.

Sunday, March 20, 2005

The Luddite of Quantitative Finance

Confession time.

I'm a Luddite that wants to destroy the mathematical machines of economics.

Yes, one of my degrees is in Finance, and yes I enjoy the beauty of math and it's implementation in science.

In the "hard sciences."

Academics love the validity they accrue by applying math to sociology, anthropology, or economics. They have to assume so much, and modify math or the discipline so much; that either the math or the reality it supposedly represents becomes a joke.

Economics has become the art of building ugly mathematical structures and calling them elegant. The models used are full of fallacies, the final product is obscene. I know, you want to know what I really think.

Economics is about people. Finance is about people. We are people, and we know that a lot of what we do is not rational. All of us irrational beings do not suddenly become rational when we form a large group. We become even less rational as a mob.

An economist would look at a large population of lemmings in a field. He could watch them for years. He could create an elegantly formulated model of lemmings travel patterns, and how close they stay to home. After all, lemmings are just rodents. Mathematically we could prove they never roam far. And then. .....

They suddenly start acting like a human mob, and run amok.

Humans can be rational alone if they work at it. Put them in a large group, be it in a broker's office, entering the housing market, or walking through a casino; and kiss reason goodbye.

Do you want a concept that may hold some promise? Prechter's work on Socionomics may hold some promise for unraveling history, but it's promise is not likely to be fulfilled by predicting next week's markets action. It may very well give some heavily veiled clues to the long term. Prechter at the core of his work realizes that markets are about the people in the markets.

Perhaps Hari Seldon of the Foundation is waiting in the wings. But we will have to wait to see if our normally aberrant behavior can be synthesized and still leave room for when the mob leaves it's senses.

If the above links don't work for Robert Prechter's Socionomics or Isaac Asimov's Foundation trilogy, stick these names in the search engine to the right. They read well and complement each other.

Friday, March 18, 2005

Tsunami Basics

Ok, wave structures first, than the tsunami,

Gain and loss occur largely because of factors that effect an entire class of investment. A raising tide lifts all boats. To every investment there is a season, there is a time for stocks, there is a time for gold, there is a time for the investing in T-bonds. At least monthly check to see if any other asset class has more promise than where you are now invested.

Watch the waves come in, they keep coming, but like snowflakes, they are always different. Mark Twain said history doesn't repeat, it rhymes. The investment and poker worlds are full of history, joyful and painful. Don't trust to much in history as a measure of now. Two winning trades with IBM, or two big pots won with JKo, does not mean you have a special blessing when encountering them. The Human mind wants, even craves, order. We will find patterns where none exist. History feeds this pattern recognition hunger, to our bankrolls detriment. Yes, narrow lapels and thin ties will be back in fashion; but the materials and patterns will be different. Don't cling to ideas based on a few data points, clean out your mental closet.

Right now volatility is quite low in the stock markets, nice and calming. Like villagers rushing out in the bay for flopping fish when the ocean suddenly, inexplicably, recedes; investors are ignoring danger signs to gain a few basis points. That big beach may not be due to tide action, there could be a tsunami starting.

Markets explode up, markets crash down, and the small standard deviation of the short term can become a once every 50 years gigantic event. Like the small bets in a no limit poker game, they may be a lure to draw out your entire table stake. I had two straight flushes in one tournament recently. Those who ran into them with a normal nut flush can curse the odds, but they were out of the game.

My hands were the tsunami. We have all run into them. They also threaten your investments. My calls of small bets drawing for the uber nuts were a hedge that paid off. If you are in stocks, you need to hedge against a tsunami.

I'll not offer much direct investment advice in these posts, but here is warning, and an admonition. Check far out of the money leap puts on an index that reflects your portfolio. With volatility low, prices are cheap. When volatility expands prices will escalate fast.

Yes these puts may expire worthless, keep the cost low. Roll them over prior to expiration if you can. If a tsunami hits, you may well earn more on the leaps than your portfolio loses. Ride the tsunami, survive the aftermath.

Of course if you acquire substantial wealth, remember those who were not equiped to Tsunami Hitchhike.

Thursday, March 17, 2005

To live is to risk, to risk is to live.

We can accept that any and every action has an attendant risk, or we can run and hide. What is important is understanding the degree of risk and the appropriate actions required.

If you are concerned about an outcome, worry, that is a good thing. You are still alive. Worry from this view point is a sign of health. Risk is part and parcel of life. If you are not worried, you are not risking enough. Or you are dead.

The key is not to avoid risk but to manage risk.

"Ya gotta pay attention."

Limit the dangers of risk by creating and following rules. Embrace risk, the worry that comes with risk, and the rewards for managing risk. You should not take big risks in every venture, but you should always play for meaningful stakes. Invest within your knowledge, skill, and talents.

If you are just starting, very small bets are meaningful. You can expect to lose. You are buying experience, get it on sale. Buy and read good books, knowledge multiplies experience, greatly increasing the value of your small bets.

Remember, you don't have to play. Professionals play constantly, that's their job. You can choose to play only when the odds are heavily in your favor, and pass when they aren't. When your rules and observations show it to be a propitious time, commit enough to make a difference. Leave the game when your rules and observations dictate.

Life is risk, don't avoid it, manage it.

Wednesday, March 16, 2005

Life is not linear

Great news,

The next 5 years will not be a rerun of the prior 5 years.

A scientist came to a horse handicapper and said he had found a perfect way to predict the winner in horse races. The gambler became excited; no more reading stats, comparing jockeys, watching the weather, etc. In other words winning would no longer be hard work and risk. The bookie took the scientist off to the side and asked for a hint to the process. The scientist said " well, first we assume the horses are all ellipses."

Look around you. How many natural shapes do you see that fit Euclidean Geometry? There is a reason we have the phrase, organic shapes. Math must force life into unnatural shapes to work with it. Unfortunately the results, while solid and comforting, have no resemblance to reality. Economists generally use linear models to predict, algebra to the fore. Algebra is great at lines, life is great at sudden huge surprises.

Some think economists exist to make weathermen look good.

An old economist saw is, "If you can't guess right, guess often." They can then point back to the closest guess and say, "I told you so." Most financial gurus fall into this camp. Be wary of anyone who claims to know the future, no matter how vague the claim. Unforeseen circumstances always surprise, that's why they are called unforeseen.

For math to be predictive or of value as a model it has to resemble reality. Reality is very messy, math is beautiful in it's symmetry. Short term all is chaos, and we all live in the short term. As Yogi Berra is supposed to have said, "In the long run, there may be no long run."

Chaos is most dangerous when we believe we have found order in it. That is when the surprise comes. I'm not talking about chaos theory and Strange Attractors, I'm talking about. ...

Finance, a poker game, sports scores, investment cycles, weather, economics; Yeppers, I'm talkin' 'bout life.

In the short term that we all live in, the danger of the unforeseen large event is the reality.

Suck out happens.

Tuesday, March 15, 2005


Sorry 'bout that prior post. Every time I fixed one thing, two others went wrong. I settled for to small.

Finance and poker knowledge should be the tough part. Personal finance blogs should be easy.

Ah well.

Hit the view button on your browser, click on text size, 150% should set it to normal.

Good luck!

Charity Shill

Drawing to an inside straight

Have you ever wondered when it might be advantageous to try to draw out?

Yes in limit poker you can predict the risk/ reward based on pot odds.

In no limit you can try to discern implied odds based on the stack size
and aggressiveness of your opponents.

What about at the final table of a tourney? Most players have lots of chips,
and with big blinds, few options.

One of your options is to go for a killer draw if the price is cheap.

Hit it, and you are a genius. Miss it and fold or bluff bet.

Here is a snippet from N.N. Taleb about the implications in Finance of similar situations.

Taleb's book is highly recommended; investigate it from the Amazon link on the right side.

Quotes from A World of Randomness by Nassim Nicholas Taleb

Let us assume that the reader shared my opinion, that the market over the next week had a 70% probability of going up and 30% probability of going down. However, let us say that it would go up by 1% on average, while it could go down by an average of 10%. What would the reader do? Is the reader bullish or bearish?

The best description of my lifelong business in the market is "skewed bets," that is, I try to benefit from rare events, events that do not tend to repeat themselves frequently, but, accordingly, present a large payoff when they occur. I try to make money infrequently, as infrequently as possible, simply because I believe that rare events are not fairly valued, and that the rarer the event, the more undervalued it will be in price. In addition to my own empiricism, I think that the counterintuitive aspect of the trade (and the fact that our emotional wiring does not accommodate it) gives me some form of advantage.


ood stuff.

Now get out there and enjoy life.

Gamblers call it variance, finance quants call it gambler's ruin.

Whatever you call it, it lurks just around the corner from your bank roll.

A professional manages their investments with a constant look at the value of their portfolio. For volatile speculations variance requires that you consider putting only a small amount at risk in similar investments.

This fits the poker table. At the end of a tournament, the player with the smallest stack is probably going home next. At a 15-30 ring game, the player with a small bank roll may be about to lose it all.

The Rush, the bad beat, good luck, and suck out. If you flip an honest coin a million times, you get that 50/50 split, but the next flip could be heads or tails. Somewhere in those million flips there were runs of 50 or 100 heads in a row, same for tails. You don't know in advance where those runs will start, or what character they will take. So what?

You can be the best player at a table due to good table selection. You will play with the same cards as the worst player at the table. You can go home the loser and he the winner, for weeks at a time. You need a big enough bank roll, or a small enough game, to survive this string of tails. If not, this is one gambler that met his ruin. The head side of the coin? The worst player may quit his day job thinking poker is easy money.

There is a lot written on portfolio size or bank roll size and surviving gambler's ruin. Skalansky's Theory of Poker is a good start. Hear from several financial practitioners in Jack D. Schwager's Market Wizards.

Read the book before you make the investment.

Don't let variance put you out of the game and send you home.

Monday, March 14, 2005

Fat Tails, poker and finance

The idea of fat tails is statistical imagery. A standard bell shaped curve is used to describe all sorts of data. The problem with standard descriptions is they don't normally represent reality. Reality is messy, math quants like things that are smooth. Look at the bell and it always seems to taper to nice, thin, end points. Plot out any data stream and there will be "outliers " that don't fit the chart. The smoothing removes these weird elements and renders a nice, predictable result. It is an outlier that kills by surprise, waiting in a gully with a high powered riffle to "dry gulch" a passerby. Whenever a statistician says something will only happen every 50 years, they have probably smoothed the data, and it may hit before the day is out. A financial company, Long Term Capitol Management (LTCM), almost brought down the world financial system a few years back. It seems that items that only can happen, oh once every few thousand years, can happen within a few years of founding your company. LTCM had two Nobel economists among it's founders and guiding lights. Oops. Bad beats at poker, where you are all in and a novice hits that 2 outer on the river. Those happen more often then they should, to you. Poker has fat tails, and unlike finance, there is no way to hedge, except to play a lot of hands at limits you can afford.

Next blog will probably be:

Gamblers call it variance, finance quants call it gambler's ruin.

Maybe after that we will try:

life is not linear

P.S. I'm always in a hurry, don't expect perfection here. Do let me know if you spot even a minor flaw at my web sites. Gotta keep them clean. Thanks


Just a quick note on something you will hear from both day traders and poker players.

The first loss is the best loss.

As an investor your long term profitability is determined by your willingness to take many small losses, and letting your profits run. As a poker player your long term profitability is equally effected by your willingness to throw away marginal hands and small bets until you acquire a strong hand, then pushing it hard.

A speculator or a poker player that can't let go when things turn bad is going to lose over the long term. The worst thing for a new player in either discipline is to win early by luck.

The cost of lessons just went up. If you discover a false precept and it works once or twice, you may have a hard time unlearning it. It's not what we don't know that hurts us, It's what we know, and we are wrong that lays the trap.

Learn to take the small loss often. Make the almost sure thing a big bet. If the reason you got in changes, better out a small lose than sorry a big loss.

Charity Shill

Sunday, March 13, 2005

Lets get started

Howdy all,

Welcome, enjoy the ride.

Oops, gotta go soon.

This space will reflect a watchers eye view as cycles run through society. We all have encountered fads that mesmerize for a moment and are gone. Pogs, Macherana, baseball cards, recently the NASDAQ stock market and day trading, and currently poker.

How do we catch these tsunamis early? How do we escape before the crash on the beach?

There is still a market for stocks and baseball cards; pogs and the macherana have disappeared with beanie babies and cabbage patch dolls.

I will try to chronicle these waves of mass involvement, and perhaps learn to ride rather than be tossed.

I enjoy playing poker, I haven't danced recently, and I'm out of the stock market; at least for today.

Check out my web sites:

Just gettin' the sites goin'. But there is some good stuff, soon to be more. I imagine some of what I write here will end up on the sites, and I'll do a few visa versas. My most recent site postis ; 8 steps to substantial wealth creation.

Let me hear from the void,

Charity Shill

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