Feb

12

We are accustomed to reading short stories like Aces Up, or Inside Straight, where the action somehow relates to the sequence of bidding and uncertainty in various card games. Yes, life often imitates the bluffing, counting, bidding, random elements, path dependence, money management, reading, and choice inherent in a good poker game. And, of course, it will be no surprise to say that in many ways the market is like a poker game, with some of the cards hidden, some showing, and random factors to come.

Indeed, I have a dozen pages in Ed Spec on it (the most worthless in the book in my opinion) mainly because I am not an educated poker player, and all I've done is read books on how much I didn't know when I did play. Another approach to poker is to think of the cards coming into your hand, say on first, second, and third street, etc., in a five card stud hi-lo game with bidding after each card, as similar to the market moves each of the 5 days of the week. When should you bid, call, fold, or cash in?

Cashing in is always possible with the market mistress. Still, like the "doing business" which characterizes many such card games, the opponent may exercise a high price if you fold. Rite now the market has dealt three of a kind, with three down days in a row. Should you hold, raise, or fold? Readers of this humble site will know the Scarnesque, Malmudesque answer already and always have their canes at hand for such a deal.

If you are long, another player has the trips, and if you are short, you're holding them. Other common hands the market might deal you are the four card outside straight, if you're holding to Thursday, for example, and are long a call at 1450 with the options expiry on Friday, and the market now at 1439. Should you draw to that straight or 3 card flush or not?

Indeed, this seems to me a rather fruitful way of looking at things. On first, second, and third street, all the way up, a good card player knows what the correct play is depending on the cards that he is dealt and whether he's playing for low or high. Do market players have similar guidelines as to how to play the hand after sequential cards are dealt to all the players? We can answer such questions for many hands that the player is dealt during the week.

For example, after you've put up a big ante it might make sense to wait around for the big announcement that's going to cause great uncertainty, like the Humphrey Hawkins testimony on Wednesday. Or at least you shouldn't have called in the first place if you weren't ready to stay in, because you knew there would be a big raise after third street that you'd have to meet.

The question emerges as to what is the best way to simulate a 52-card deck with 13 numerical and face cards, and four suits. This will enable you to come up with rules of thumb as to when it pays to go for it based on expectations at various stages.

I would again propose using the five-card high-low as an analogy that, depending on whether you're long, short or straddling, you divide up the cards.

Since I know even less about poker than I know about trees or electronics or most of the other things I write about, besides the defunct game of hard ball squash, I had better leave this as an exercise for the reader. I'm not hubristic enough to give my own solution now knowing that so many better ones will come to the table. Subject to my admission of ignorance, however, if none comes I'll take a crack at it.

Steve Leslie adds:

There was a time, when hold 'em was not the game of choice in poker rooms around America. In fact, if you were to speak to the old timers, many were totally unfamiliar with the game. It has only recently become a phenomenon, brought on by the technology of the 21st century and the ability to see the players' hole cards. Along with television came the great exposure of the World Series and as a result the game of choice today is no limit tournament style hold 'em.

Although the game is termed the Cadillac of poker, in the 90s the game I played was 7-card stud, or eight or better. I played this game for three years or so and I can honestly say that I consider myself to be one of the best stud players around. It plays into my skills very nicely as it is the most statistical of poker games. It also has the most information available as you get to see most of the cards. Players with have photographic memories and those who can think quickly have a great advantage.

This is a variation of the traditional 7-card stud, where the high hand and the low hand split the pot. In order to win the low hand, however, you have to have five cards out of seven that are no higher than an eight and the best possible hand is A, 2, 3, 4, 5. This is called a wheel. Straights and flushes do not count toward the low hand but they do for the high hand. Therefore, you can win both the low hand and the high hand at the same time.

Other than that 7-card stud, eight or better is very straightforward and there is very little bluffing. The true objective of the game is extreme patience and waiting for a starting hand that gives you the highest probability of success.

Here is the great secret to playing 7-card stud, 8 or better. Start out by playing only toward a low hand with an objective of also filling out your hand and winning both the high and the low. This is called sweeping the pot. In order to be profitable in this game you want to win one big pot an hour and sweeping is the best way to do so.

Therefore, you start out with three cards, two down and one up. The best starting hands are three cards that are in a row and of the same suit. A 3, 4, and 5, of spades for example. This constitutes the first round of betting. After that there will be four rounds remaining and one card at a time will be dealt to you and the last card will be dealt down.

If your first four cards are eight or less, then the likelihood that you will make a low is 80%. If you have four cards to a low after the fifth card is dealt, then your chance of success is 50%. There are two critical decisions that the stud player makes in the game. That is after third street and after fifth street. If by fifth street you don't have four low cards, you give up the hand. If you have four to a low by fifth street, you are committed to seeing it all the way to the end. It is really that simple. Properly played it is just beautiful. Poorly played it is absolutely brutal.

People get into trouble by playing high hands. The worst thing to have happen is to play a high hand only and come in second. This is very expensive, especially if someone makes her low and starts raising the pots as she should. And if the low also makes a high then the high is swimming against the current along the way.

The corollaries to a 5-day trading week are self evident. With respect to stocks, using William O'Neill's approach, your highest probability of success is by selecting stocks that have an eps rating of 80 or better and a Relative Share rating of 80 or better and investing in those. This will be your starting hand of three. If the stocks go down seven percent or more after investing in them, you let them go. This is the same as letting your hand go after 5th street as it just did not fill out as you have would liked.

Now I don't necessarily espouse the theory of the 7% rule, as I deem it as too tight for my tastes. It does not give the story time to play out. I rather have a more flexible stop loss level and do not overplay my hand. That is to say I do not chase cards. I do not commit too much of my capital to any one stock either. And if I feel I have a winning stock with good earnings, good relative strength, and in a good group, then I am willing to play it out to the end. Eventually, it will be recognized for its value. If I have an accommodating market on top of those variables chances increase to where I can get both the high and the low. This is where the great reward comes in. Once again, patience is the key. And having the earnings and the relative strength on you side helps provide the patience.


I hope this illustration is helpful. For a more in-depth discussion of the study of 7-card stud, eight or better see me offline.

 

Larry Williams writes:

"[R]esearch on strategic behavior in economic games has identified a wide range of situations in which thinking one step ahead of an opponent provides a decisive advantage. Research on behavior in markets shows that failing to think carefully about other participants' likely actions leads to adverse consequences, such as the ‘winner's curse’ (the tendency for auction winners to pay too much)."

From On Making the Right Choice : The Deliberation-Without-Attention Effect, by Ap Dijksterhuis, Maarten W. Bos, Loran F. Nordgren and Rick B. van Baaren Department of Psychology, University of Amsterdam 


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