Dear Investing Community inside 2p2,

this has probably been asked before, but I cannot find sufficient stuff on the internet, so I turn to you, my dearest, oldest poker community:

Background:
So, I was an online poker professional ten years ago, then turned software engineer, then turned quant, now getting tired of that.
In my time, "winning" meant: having a significant (>4bb/100) winrate over at least 100k hands.

Problem
So, I thought to myself: Why not try trading a bit? Portfolio Management is trivial, so why not try exactly what I did before: dealing with other people's expectations`?
And become a trader?

So I read a book by Nassim Taleb about Trading: "Dynamic Hedging". And understood nothing.
Except: He wrote: "I am a trader with 70,000 trades on my belt life-time." And he meant: "So I know what I'm talking about! I am mad experienced!"

As a former poker pro this seems kind of ridiculous to me: You play 100k hands a month, with a 25% VPIP, 50/50/50 (to make it easy) WtT, WtR, WtSD, you have a
whopping 100k + 25k + 12.5k + 6.75k + Reraise/Fold decisions to make within a month. Maybe 200k?

Question
A man who is so totally fond of himself understanding variance - Taleb - how can he come to the conclusion that his 70k decisions lifetime constitute to much?
How can I even remotely relate that to my understanding of variance as a former poker pro?

First off Taleb is an egotisical dickhead. That said Fooled By Randomness is one of the most important books ever written Anything else he has written is probably not worth reading. Poker does not equal trading.

You can sit at a poker table forever and thus play many hands. You can stare at the market and wait for a trading opportunity for a while. I was a market maker so I made many more than 70K trades in my lifetime because it was my job. Now that I am not "providing liquidity" I don't trade nearly as often. More trades (usually out of boredom) isn't a good thing generally. I never read the book you mention but since Taleb is such an insufferable prick I can't help but think it is off putting.

Hahaha!

Thank you very much! That's exactly the lore I love to hear in this forum.

Why don't you think, "providing liquidity", "making markets", just: "making more trades" makes the variance smaller?
Where should I adjust my thinking?

My - probably naive - thinking: Betting on whatever is a noob game. In the long run only the guy who has the edge is
the guy trading high frequency.
Everything else is just variance.

That's just me from a former poker pro perspective.

Why is that so wrong?

I am probably very naive, but that's why I am asking these questions right here.

it's very different. When you play poker you want to play a lot cause you want to put volume on it. When trading you don't want to open too many trades because in lower timeframes is all about noise, add the spread plus fees and you have zero chance to beat lower timeframes. Lots of traders say the money is on daily-weekly charts.

Also is a very shady world, too many people say they win money but it's almost impossible to probe, also lots of traders win money in a bull market but but ironically they would have won more just with the buy&hold strategy cause in a bull markets everyone makes money.

Variance in trading and variance in poker are massively different .

Luck variance in poker is equal for everyone once u play tremendous amount of hands .

In trading you make a bad trade , u can’t count on luck to bail you out .
( unless u consider others making bigger mistakes then you being luck )
So there is no points to try mitigate variance by increasing volume trading .

Warren buffets is not considered a day trader and he probably is the best track record investor ever or close to .

In investing you have the option to only play aces because if you don’t play , no blinds comes in to eat your saving (disregarding inflation to make a point ).

In poker you have blinds that oblige you to play more hands to beat the blinds cost .

If no blind existed in poker , it would be a mistake to play any hands other than AA .

A trade is more analogous to a poker session than a single hand.

The simplest way to think about this is that even the very best poker player's edge on a per-hand basis is extrememly small. Hence, you need an extremely large number of hands to overcome variance. Virtually no human trader/investor operates with such low return expectations on a per-trade basis.

Let's consider a hypothetical +5BB/100 player, who plays with an average stack size of 200BB. This player earns 0.05BB per hand, despite risking 200BB every hand. That's the equivalent of investing $40,000 with the expectation of earning $1 per trade. Now, typically, even when you lose, you don't lose your entire stack, so the effective amount at risk per hand is much smaller, but this is also true of trading, you typically don't lose everything when the trade doesn't work out for you.

For most trades and investments, time is also a significant component - if you buy something and sell it 100 days later, you effectively made tons of independent bets to keep the investment - the decision to hold the investment from 1pm to 2pm is largely independent from the decision to hold the investment from 2pm to 3pm, from a pure risk-reward perspective.

Time is your measurement, not trades made like hands played. When I was trading more actively than I am now I would break it down to days, weeks and months. I never looked at trade by trade types of results. Obviously, days have more variance than weeks and weeks have more variance than months.

Trade by trade I had more losers than winners but with my approach my winners were bigger than my losers. Day by day winning days were still slightly below losing days. But week by week the tide turned and I had a much higher percentage of winning weeks. Monthly a down month was pretty much non-existent.

Now I am just playing around with option swing trades and I do a lot of far out calendar spreads and condors and butterflies. They can often take a few months to materialize.

If you look at the formula for variance and think about it for a bit you can see what really matters is that the magnitude of the outcomes are similar (ie: because of the squaring).

So for poker you need such large sample sizes to get a representative sample of the few % of hands that really effect the variance; all those 1000's of hands where you fold preflop and lose a tiny amount make almost no contribution to the final variance per hand.

This is an interesting old thread that shows this:

https://forumserver.twoplustwo.com/2...d-not-1410413/

Iirc, there were 1/2 a billion samples but just a handful of huge bets by "whales" completely swamped the variance and bootstrapping showed the chance of the "bad luck" from the investors perspective was about a 1/20 event.

Juk

Are those option trading lingo? Never heard of those term before.

You should check out a site called Google. You can search stuff like "condor options" and "butterfly options" and it will show you results from other pages on the internet.

grunching here...

i've seen strategies from the credit crisis that would have killed it.

BUT....

some of those strategies would have consistently lost money (on some rolling period, say 3 years) since the early 1960's. that's the longest i had data back for them.

so you would have had angry clients every year for 46 years............

it would be interesting if both players (perhaps both voting on paper simultaneously) could agree to take the EV of their respective hands before an all-in battle... reduce 80--20% variance for example.

pains me to say this, but sklansky had a good idea...... he said (paraphrase, and i made up the exact numbers), "sports betting sites/casinos should have you bet point spread on 8 games......... but the max payout and max loss is based on a range of 2 to 6 winning bets... just eliminate 1, 2, 7, 8 winning bets (floor and collar, in wall street option lingo).

i am going to model the variance of this idea.

as a follow-up,

i am having great success on many free sites (yahoo, bigcharts, barcharts and more) getting two stocks on the same chart i.e. each of their price charts.

BUT,

still shutout on getting a line of "relative strength" for the 2 price series.

i am dinosaur but i remember this being much easier years ago when there were fewer choices.

Wow, this old post really struck a chord with me, haha. Transitioning from poker to trading definitely has its challenges, especially when it comes to understanding variance. I used to play online poker too, and the sheer volume of hands makes it tough to compare to trading decisions. I get why you’d feel that way about Taleb’s 70,000 trades; in poker, you can rack up those hands in no time.

the two disciplines having NOTHING in common, and trying to associate the two is like saying making a salad is analogous to a cooking 4 course turkey diner.

Variance is just as we understand it... a differential from the mean.

If you have a job with an average daily commute is 30 minutes does not have a correlation to poker just because you Monday commute is 40 minutes and your Friday commute is 20 minutes.

understanding variance in Investing is quite an easy task... you want to smooth out your costs by Dollar Cost Averaging and holding for long term gains.

Warren Buffet isn't a genius, he is a simpleton. He bought low and sold high!
He has held much of his portfolio for such an extended period of time, that it inevitably will be more valuable (thru network effect) than trying to arbitrage profit thru constantly trading. If you add to this the extreme inflationary effects of a weakening dollar, you can clearly see that the gains are significantly 'on paper'.

there are different disciplines of investing, such as hedging and arbitrage, but unless you are very attentive and managing (by the second/minute sometimes), your best solution is a buy and hold strategy using Dollar Cost Averaging. This extends to hard assets also.

the two disciplines have something in common, which is why a lot of trading firms use poker as a learning exercise or test

bankroll management, weathering variance, imperfect information, exploiting fish...

I would like to bring three quotes from the Oracle of Omaha:



We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don't. A public opinion poll is no substitute for thought. When we really sit back with a smile on our face is when we run into a situation we can understand, where the facts are ascertainable and clear, and the course of action obvious. In that case - whether other conventional or unconventional - whether others agree or disagree - we feel - we are progressing in a conservative manner.

Buffett Partnership Letter - January 1965



The above may simply be "old-fogeyism" (after all, I am 37). When the game is no longer being played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, etc. I have been scornful of such behavior by others in the past. I have also seen the penalties incurred by those who evaluate conditions as they were - not as they are. Essentially I am out of step with present conditions. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital.

Buffett Partnership Letter - October 1967



We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.

Warren Buffett's 1977 chairman's letter





Just to make a counterpoint to this:

So I read a book by Nassim Taleb about Trading: "Dynamic Hedging". And understood nothing.
Except: He wrote: "I am a trader with 70,000 trades on my belt life-time." And he meant: "So I know what I'm talking about! I am mad experienced!"


Cheers!

I read this as well, back when I was reading everything about options I could find. But it is not a book about trading. It is a highly mathematical treatise on vanilla and exotic options, as the subtitle suggests.

Trading is more about remaining in agnostic position untill you have an edge and only then betting. The larger the edge the larger the bet should be. Its not the goal to make many trades. Its higher skill lvl to make fewer trades with larger edge.

In poker you earn very, very small EV every time you make a decision.
Let's say you beat the pool for 10BB/100.
In 100 hands you make only 10% of a buy-in, supposing it's 100BB deep. (The buy-in would be equivalent to the trade position)
For every hand you play you make only 0,1% of a buy-in.
In trading if you have an 80% win rate with 1:1 risk X return ratio, you make 60% of a buy-in per trade on average.
In 100 trades:
80 wins
20 losses
80-20=60

Look at the difference of relative profitability of a trade VS a poker hand.

That's like if ALL of your hands go straight to showdown with 80% equity.
The variance in a 100 trades sample = the variance in 100 poker hands that went to showdown with 80% equity.