Warning: This is a High Risk Post … it’s only for those poor misguided souls who INSIST on speculating (be it: stocks, real-estate, FOREX, commodities, etc., etc.) … don’t do it! But, if you MUST try to gamble your way to a fortune (admittedly, it has – albeit RARELY – been done), at least read on ….
I have a confession to make: I love playing poker.
I had never played a hand – nor gambled at all (I hate any game where the casino odds are even 1% or 2% against me … why throw money away?!) – but, then I arrived in the USA and turned on the television just as Chris Moneymaker was bluffing Sammy Farha on his way to making history at the 2003 World Series of Poker …
… it was like meeting the eyes of a woman across a crowded room; it was (I am ashamed to admit) ‘love’ at first sight 🙂
Which brings me to the Universe’s Cruel Joke, and it goes something like this:
I exclusively play No-Limit Texas Hold’em but met a friend who is one of the world’s top Pot Limit Omaha pro’s … in fact, I now take tennis lessons with him. This (not him!) convinced me to give the game a try, so I throw $40 (being sensible, no need to throw ‘real money’ away) into an online table while I’m chatting to a friend over the ‘phone and what do you know, I’ve made $200 about 3 minutes later!
This is a game I could grow to love, so I proceeded to lose $4k over the next few weeks, playing my usual limits …
… oh, I know this is just ‘variance’, because I’m in with the best hand almost every single time 😉
Which brings me to Josh:
Josh is one of our 7 Millionaires … In Training! and he intends to make his money trading according to a system that he has been developing for trading pharmaceutical stocks. I have high hopes for Josh, and he will probably end up with his own hedge fund, if he survives his good luck.
You see, Josh has just hit it big – and sudden – as, he explains:
My net worth increased over 1200% on May 7. Check out my networth profile I updated recently.
[I put] the whole 401(k) and personal brokerage account into a penny pharmaceutical stock, (avg price was around .0475 cents.) Today it closed at .82 cents. The stock is TTNP, Titan Pharmaceuticals.
Adrian, when are we starting MM-201, I’m jumping out of my skin here?
As I said to Josh:
If you MM201′ed any harder, you’d burst
You see, it’s easy to make money when you find a stock that climbs straight up like Jeff’s Hornet on full after-burners, it’s MUCH harder to:
a) Repeat until rich, and
b) Keep it, once you’ve made it.
What has this to do with poker? More importantly, what does poker have to do with investing?
Well, if you are a trader/speculator … everything!
You see, poker is a high ‘variance’ activity – that means that there is both a skill and luck component – but, you may know this as high risk / high reward. And, the best friend of the professional poker player is not skill … or even having luck on their side … it’s bankroll management.
At its simplest, ‘bankroll management’ means not allocating too much of your bankroll (i.e. capital) to any one session, and walking away when you lose that … at its most complex, it can involve a whole set of rules, such as Chris Ferguson’s poker bankroll management system …
… Chris is a top poker professional who – as his own ‘grand experiment’ – set out to make $10,000 starting with just one penny. Even though he had great skill – far greater than any of his opponents at the levels that he was playing at – he knew that he needed to protect himself from that devil known as ‘variance’ (i.e. sheer bad luck):
Here’s how he did it:
Starting with nothing but a Full Tilt Poker account, Chris played in Freerolls until he earned enough to graduate to games with real-money buy-ins. From that point on, he adhered to a strict set of guidelines to build up his bankroll:
- He never bought into a cash game or a Sit & Go for more than 5 percent of his total bankroll; the only exception was at the lowest limits: he was allowed to buy into any game with a buy-in of $2.50 or less
- He didn’t buy into any multi-table tournaments for more than 2 percent of his total bankroll; the only exception was $1 MTTs
- If at any time during a No-Limit or Pot-Limit cash-game session the money on the table represented more than 10 percent of his total bankroll, he had to leave the game when the blinds reached him
Getting started wasn’t easy. In fact, it took more than seven months of steady play until he got his bankroll to stabilize at about $6.50. Undaunted, Chris maintained his discipline and dedication and continued with his challenge. Then, on November 26th, 2006, Chris made a major breakthrough. He turned a $1 tournament buy-in into $104 in prize money when he finished second in a 683-player tournament. Even with that huge bankroll boost, it still took Chris nine more months of hard work to reach $10K. But because he strictly adhered to the bankroll management strategy that he’d set for himself, Chris achieved his goal the following September.
Besides the sheer similarity in Josh’s and Chris’ graph, there are clear parallels between poker and trading … if you still can’t see them, stop and play a little $1 / $2 no-limit hold’em online … you’ll begin to see my point, pretty soon 😉
What has this to do with personal finance??!
Well, for traders and speculators,’bankroll management’ – which we call Making Money 101 – is also the most important skill that you need to learn so that you have a base to work from and a fall-back …
… if you are still not 100% convinced, I would encourage you to grab the book about Jesse Livermore – The World’s Greatest Trader. I want you to see that he became rich and broke FOUR separate times (then, blew his own head off) … I don’t want this to happen to you.
Once you really FEEL this, read on – otherwise, just bookmark this post and wait … nothing produces discipline better than the inevitable major loss …
OK, if you are now TRULY ‘on board’, I want you to break your ‘windfall’ into three easy (well, equal) pieces:
1. Trading Account: do more of what you just did, and hope to repeat (just remember NOT to put all of your position into one investment … ONLY invest into one ‘event’ what you would be happy to lose 100% of without suffering unduly)
2. Passive Investment Account: Buy a rental; or buy/hold ‘boring stocks’ that you would be happy to own forever … fight the urge to trade these stocks!
3. Savings Account: This is what you live on (assuming trading is your major source of income), keep this in cash or CD’s. I told Josh to use this as a deposit on his own condo.
When you lose 1. (almost all poker players – and traders – lose their ‘bankroll’ at least once in their lives … some MANY times a.k.a. Jesse Livermore) forget about ever ‘dipping’ into 2. or 3. to try and ‘catch up your losses’ … it won’t happen(!): you will simply have to go back and build up a new trading account from scratch … just like you did when you first started out.
Always remember this ‘3 easy pieces’ approach to windfalls and you won’t ever go [completely] broke …
Rich 1; Broke 0; Head [Intact] – not a bad scoreline