Tuesday, December 25, 2007

Sticking with the original strategy

Since my trading has been really bad lately and football has been absolutely dreadful for me (thank goodness the season's almost over) I started playing some poker again.

I've gone back and forth between playing short stacked in a higher stakes game and buying in for the full buyin in a lower stakes game. The general rule is that you want to buy in full and play at a level where your bankroll can take a lot of hits. The advantages of the full buy-in include the ability to really play a post flop game and the ability to maximize your profits when you have the opponent drawing thin.

However, there are still some advantages to playing short stacked in a higher stakes game. First, I find that in online poker, higher stakes players are actually worse than lower stakes players up to a certain buyin level. Second, by being short stacked, there are less post-flop decisions and you can often pick off players who are trying to build the pot with weaker starting hands.

I'm sure there are more pros and cons for either style, but the main thing that I've come to realize is that whichever style and strategy you're playing, it is more important to be clear about the strategies and stick with them. For example, if you're playing NL Holdem and you bought in for the minimum, you should refrain from playing a lot of suited or connected hands, especially if you are not the aggressor or you are out of position. People play these hands because if you hit your hand, you may take down a big pot. But because you haven't bought in for the full amount to maximize the pot in case you hit, the expected value of playing such hands goes down dramatically.

The above point is something that is probably pretty well known. The point I want to make now is a little different and I frequently see people doing the opposite of it. I feel that if you're playing short stacked, you need to leave the table as soon as the stack has grown. Whether it be double or triple the short buyin, there needs to be a limit set. I've seen too many people buy in for the minimum, build it up pretty well, lose it all on one hand, then buy in for the minimum again. The problem that many people don't see is that even though that one loss probably was a bad beat or something, it's still well within the percentages. Using one of the examples I frequently talk about, let's say you're playing a guy who always goes in against you with an underpair. You're pretty much favored against him 4-1 all the time. The problem is you're going to lose 1 time out of 5 and if it happens after you've been building your stack pretty well, you'll be negative overall even though you're a huge favorite. So if the plan is to play a short stack strategy, then you need to stop it once the stack is no longer "short".

I also feel that this concept of sticking with the original strategy is useful in trading. I find that even though I make a trade based on a short term catalyst, I will try to make more on it than the original expectancy based on the catalyst, and end up with no gain. Conversely I will make a trade using a long term catalyst and end up taking gains too quickly and not maximizing the profit on the trade. Hopefully I will learn this lesson and apply it both to poker and trading.

Monday, December 24, 2007

Happy Holidays!!!

Happy holidays to all and to all a wonderful 2008

Time to stay indoors as the weather gets colder. So I'm watching more movies...

I saw "I am Legend" and "Juno" last week. Both were excellent and "Juno" was much better than I thought it would be. "I am Legend" was really good but I read a summary of the original book somewhere (was it on wikipedia?) and the original book sounds even more interesting.

I also saw "The Heartbreak Kid" on pirated DVD last night and it was really funny. Raunchy and definitely for adults, but very fun.

It seems there aren't many holiday-themed movies out this year.

Sunday, December 9, 2007

Hong Kong International Races

A big day with big names from all across the horse racing industry, the Hong Kong Jockey Club really outdid themselves this year in terms of overall racing quality. The following are a few personal thoughts and insights from this year's Hong Kong international races.

1. Sacred Kingdom is scary good. It gave a shellacking to a horse that gave a shellacking to last year's best sprinters and a horse that set the course and distance record. There were plenty of excuses for Miss Andretti but in the words of The Rock, "IT DOESN'T MATTER" if Miss Andretti had gotten a better run with the performance Sacred Kingdom put in. Pretty much the same as last year when Takeover Target couldn't run but Absolute Champion's dismissal of that field made it clear who was going to win anyway.

2. A horse that is specifically prepped for a race will always run better than those that weren't. In this year's case Dr. Dino was specifically prepped for the Vase and put in a brilliant performance, while Dylan Thomas only made the trip here as a last chance to get a race in before retiring to stud. When Dylan Thomas put in that poor performance in the BC Turf it was clear that he had topped off in the Arc, which was exactly the race that Aiden O'Brien specifically prepped him for.

3. European mile form is incredibly useless. Like I said when previewing the BC Mile, asian sprinter-milers are the best and Good Ba Ba won an excellent race with Excellent Art nowhere to be found. You could make a case for saying that both the runner ups were European horses but their forms were Classic forms, with their mile form at the 1000 and 2000 Guineas races. All I'm saying is that the form from European G1 sprint or mile races don't tend to hold up very well.

4. Frankie Dettori is still the best turf jockey in the world. The run on Creachadoir from the outside draw to end up on the inside of Good Ba Ba was brilliant and the fight he put in the horse after it got headed by Good Ba Ba resulted in one of the better duels I've seen in a HKIR finish in a while. There was also a spectacular run on Ramonti in the Cup where Dettori gave up the rail to make sure he had a nice run with a horse to follow for cover as Ramonti started out very keen. Which brings us to...

5. Mick Kinane is still the most frustrating jockey to watch in the world. He is still one of the very best big race jockeys and I wouldn't want anyone else on if I had a backmarker horse and a long straight like at Longchamp. But Kinane gets into trouble more than any other big race rider I've ever seen. I remember greats like Rock of Gibraltar and Giants' Causeway that would rumble home down the straight but end up just a little shy because it was sitting in the box for so long.

6. Not that I think it would have made a difference to the result, however. With Ramonti having the initiative and the final 400m run in 22.7, there's not much that can be done to chase down a world class horse. Anywhere else in the world the owner or trainer of Viva Pataca would put in another horse (a rabbit) to make sure it was a truly run race and really test Ramonti's stamina. But Hong Kong has a really really big thing against collusion and corruption and the like so even simple tactics like that are essentially not allowed.

Final words on Hong Kong hopefuls:

Sacred Kingdom is clearly the best sprinter in the world and I hope Ricky Yiu takes it abroad to throw the gauntlet down. Ricky's a trainer who's had two of Hong Kong's best horses (Fairy King Prawn and Electric Unicorn) taken from him while he was still winning with them! He's got to keep proving himself I guess.

Another possibility is that Absolute Champion travels the world if Sacred Kingdom stays put. It'll be a carbon copy of when Cape of Good Hope travelled the world winning G1s because Silent Witness was too strong and wouldn't leave Hong Kong.

Vengeance of Rain might be done at the very top world class level. The horse had achieved a lot, even before the Dubai Sheema win, so it's natural that the horse is past its prime.

Could it be that Viva Pataca is now at its best over a mile and a half? I believe if you have a horse that can perform at that level at the Classic distance you take him around the world to the very best races (Japan Cup, L'Arc, Diamond Stakes, etc.). However, John Moore seems to have this infatuation with the Cox Plate and I'd be very disappointed if that is the big race he preps Viva Pataca for next year.

No idea what will happen with Good Ba Ba. It's tough with a horse that is not ultra-consistent (Good Ba Ba seems to either win or not be in it) and a horse that is not even a clear lock to win all the domestic mile races (Armada might come back, and in general there are a lot of genuine top level milers in Hong Kong). But with that turn of foot I do hope Good Ba Ba gets taken abroad, and I don't count the Yasuda Kinen because that is probably the toughest turf mile race right now in the world and yet doesn't get the deserved recognition.

Trading vs. Investing

Wow I really haven't been able to get myself up to write a post at all. A big part of that is that fact that I've been back trading for a little over a month now, and it really just takes up a big part of my life. I've always had a high variance as a trader and now that I'm no longer working for a firm, those swings seem magnified. Especially on the downside. So it's been much tougher to get back into the mood of writing, but hopefully I can start again.

It's really hard enough to explain what I do to someone who isn't knowledgeable about finance, but sometimes I find it just as hard to explain it to someone who's been working on the investment side of things (I have a few investment banking friends). So I'm going to write a short list of my opinions on the differences between trading and investing.

1. Traders make money through the mechanics of the market. This includes taking advantage of supply and demand, mass group psychology, etc. Investors make money through the assessment of the worth of a company, and base any projections/predictions on the mechanics of the company and its business.

2. An investors' aim is to buy something that is undervalued and sell it when it is overvalued. Hence the term "buy low sell high". A traders' aim is to buy something when someone else is willing to pay higher for it, regardless of its worth or value. Hence the term "buy high sell higher" (If you've never heard of this before you'll hear it on some shows that focus on traders, such as Fast Money on CNBC).

3. Investors use fundamental analysis because it is a study of the company and its business. Traders can also use fundamental analysis because having an objective valuation of a company means having more information. However, traders also use technical analysis, a graphical or quantifiable representation of past human behavior, to predict future behavior patterns in the markets. An investor who focuses on the company itself would find no use for that.

4. Investors should have much slower diminishing returns on investment because short run supply and demand does not have as big an effect on an investor's bottom line, while a trader can make a trade based solely on supply and demand and therefore have the terms of their returns completely dictated by the marketplace.

5. Trading would be a zero sum game IF there were no investors. I feel that investors are not part of the game of traders/speculators and so any losses incurred by investors in using the marketplace that are credited to traders do not enter into my considerations for a zero sum game. A market with only traders/speculators would be a zero sum game because it is self-contained. Investors' smaller emphasis on short run supply and demand separates them from the trading game.

6. The actual cost of stocks relate to investors' perspectives, not traders' perspectives. All stocks should be priced to theoretical perpetuity, ie. a present value based on an educated guess of how long the business will run. A trader's time frame will always be too short to fully take advantage of perpetuity while an investor can pass on holdings for generations to come.

Because of point 6, I am especially reluctant to give any advice on stocks because my perspective is that of a trader. If I tell you to sell, often it is because it is better to buy it back a week later. But as an investor, will you do just that?