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Blackjack and the Markets by Kevin Eilian
One of my hobbies for quite a while is keeping track of the cards and playing profitable blackjack. I don't play regularly, and certainly not for huge stakes - I do have fun with it, and recently on my vacation I found myself at a nice two deck game in Reno. As a Spec, the analogies to the Markets always ring true, namely;
1) Virtually nobody except the truly skilled and experienced even has a chance...
2) MEMES are the rule. There are so many ridiculous MEMES floating around, that the basic good knowledge is chased out by the bad (a couple of GREAT blackjack books crowded out by tips, hunches, myths and folklore (many bad investment books, newsletters, TV shows etc). How many investors could benefit from just a few chapters from PracSpec...such as those that debunk the strongest investment memes today, namely, the Buffet chapter, the P/E meme, or the meme stressing the misplaced overemphasis on REITS etc...
2) Most people who come and play really DO think they have an edge (secret betting systems, streaks etc), but have nothing. Between slippage, commissions and strategies consistent with randomness they lose MUCH more than they rightfully should, thus supporting the vast gambling (market) infrastructure. As Vic always points out, they lose much more than they should reasonably lose.
3) The most simple and useful strategy is often ignored or underutilized to the detriment of the average investor (player); In blackjack, that is "basic strategy" which doesn't involve keeping track of ANY cards and can be learned by a 10 year old (it is very rare that I see a player that utilizes 100% proper basic strategy, even though that on the Las Vegas strip, basic strategy will give you a totally even game with one deck, and a virtually even game with two). In the markets, the analogy to basic strategy is the "index fund," the most basic and simple of all investment strategies - one which allows the investor to outperform the vast majority of other investors over time (apparently, this ain't good enough for the tens of millions of investors who either ignore or underutilize this basic approach).
4) The odds on any given blackjack hand can shift quite dramatically (+ or - 10 percentage points can be observed, both intra deck (Intra DAY), and between decks (overnight trade)...
5) The "dealer" is much like the mistress - NEVER gets tired, fatigued, or makes mistakes related to miscalculation. Both are like robots.
6) The GORILLA player eventually gets gunned for. In the markets, if you become the biggest and best, the market makers, sell side guys, other funds, will gun for you and make it very hard to maintain your edge. Once the sell side guys know your book, they will transmit the info to other of their big clients or to their own big boys upstairs. They will often unleash the elephants (LOBAGOLA) on you in an effort to snuff you out. In blackjack they will notice your play (eye in the sky, which could also be the "back office" leak), and at first may shuffle and reshuffle (slippage, bad fills), and eventually CARRY you out, if not with the stampeding elephants, than with the big burly security guys chasing after you (and if they manage to reach you, carrying you out). Not really advantageous from rate of return perspective by becoming a gorilla in the markets or as a big bettor at the tables.
7) Probability of wipeout GREATLY reduced in the markets and blackjack by being well capitalized and by lowering unit size, chipping away at the small advantages that appear every so often (every couple of days - every couple of DECKS).
8) Counter deception techniques are useful in both pursuits - in the markets, to avoid others from gunning an exposed position, buy and sell various amounts at the same time to cloud your position to others. (Tudor demonstrated that technique in his video in the S&P futures), In blackjack, lose a hand or two when others are watching you, making them delight in your silly play. If someone with a big line is watching your position (either the PIT BOSS, or some particularly interested party on the sell side), tread carefully. The sellside guys can tell the guys "upstairs" (in blackjack, "Eye in the Sky") and you might not like what these guys have in mind for you for your position (see #6).
9) Markets have a "memory" for the short term (as Vic points out, one maybe two days), and cards have a "memory" too, especially within one or two decks...
10) Too much risk in a trade can cloud your judgment and lower your edge. So, as in #7, keep your betting size reasonable to keep your wits. Personally, even if I am playing "small" blackjack units, I tend to lose my calculations and overall perspective if I end with too many units riding on one hand.
11) When you cannot play with a clear mind, get out and relax (leave the table). It could mean that you are too distracted or too tired to play against your indefatigable opponent.