I am certainly not among the crowd that holds that good poker players make good investors or vice versa.  I always seem to hear that from people who are good poker players, and I think that there might be some wishful thinking going on. Based on my small sample of the three, very good poker players I’ve worked with, I’d say a third are terrible, a third are mediocre, and a third are so weird I couldn’t tell what they were. But there are still some poker concepts that seem directly applicable.

The first is the concept of finding a good game. Poker theorist David Sklansky wrote, “Whenever you have a choice, your ability and willingness to find and play in the game that is most profitable is the most important aspect of your earning power. No matter how well you play any game, it is the abilities of your opponents that is the main component to your expected win.”

This seems universally true. Blackjack players (like our founder) know this. No matter how good your card counting system is, you would much rather play in a game with a hand dealt two-pack deck than in one with an eight-pack deck. And if that deck is shuffled after every hand, then there is no point in playing at all. The same concept applies to sports betting, where serious bettors would much rather hit weak prop markets than try to predict winners in the NBA.

“The hardest part about being a good quant is figuring out what is the right thing to work on.” – Petra Bakosova, CEO of Hull Tactical Asset Allocation

“I’d rather be an average trader in a great pit, than a great trader in a bad product.” -An average trader I once worked with

This concept can help us with investments. Individuals should look for situations where it is unprofitable for others to play. There are two factors where this is particularly applicable. The first is the size factor. Large investors find it very hard to obtain any meaningful exposure to small cap stocks. There is simply not enough liquidity. And this restriction exists for account sizes that are surprisingly small. Even a $10 million account is going to have trouble buying small cap stocks. Small investors should see this problem as a great opportunity for them. It might be tricky for them to buy small caps, but it is impossible for the big players. The benefits of owning small caps are not unknown. They are just difficult to harvest (this is another good trading principle and our opinion: the difficult thing is often the correct thing).

But note that this isn’t an advantage due to knowledge. It is sometimes said that small investors can have an edge because they can spend time looking into companies that big institutions don’t bother with. I think this is a stupid argument. It is doubtful small investors ever know something large ones don’t. But large investors are limited in other ways. Knowledge is interesting, but exploitation makes money. You don’t need to out-think the market. It is better to find a small pond.

Disclaimer

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Except where otherwise indicated, the information contained in this article is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. Recipients should not rely on this material in making any future investment decision.