Texas Holdem Investing - An Introduction

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TEXAS HOLDEM INVESTING An Introduction Learn to Invest – Texas Holdem Poker Style By The Masked Financier Copyright © 2005-2010

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TEXAS HOLDEM INVESTING

An Introduction

Learn to Invest – Texas Holdem Poker Style

By The Masked Financier

Copyright © 2005-2010

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Disclaimer

Texas Holdem Investing ™ is an educational method and the author is not

an investment advisor or intermediary.

The Texas Holdem Investing ™ material is intended to assist people who

have decided to put money at risk in the financial markets or in financial

market instruments but it does not recommend a particular strategy or

investment. There are serious risks inherent in investing money in the

markets and in market instruments. It is the individual responsibility of 

each reader/investor to assess these risks in the light of their own financial

circumstances and investment requirements and in consultation with their

own investment advisors as appropriate.

Texas Holdem Investing ™ demonstrates poker and investment concepts

and gives examples of investment scenarios only for education and

illustrative purposes. It is the responsibility of each reader to assess the

merits and risks of the poker and investment strategies and to assess thedifferent investments and asset classes that may satisfy the relevant

criteria in deciding whether to invest in particular asset classes /

securities / instruments or not.

Texas Holdem Investing™ cannot and will not guarantee or represent that

any poker or investment strategy or investment will produce a positive

result. Each reader of this material implicitly and explicitly accepts that

poker involves high levels of risk of monetary loss and that the value of 

investments can fall as well as rise and act accordingly.

It is ILLEGAL in many countries to organise / host / play Texas Holdem

Poker for monetary reward both with respect to games played physically or

on the Internet or similar computer platforms. Legal penalties for this

activity in these countries are severe. This book and its author strongly

discourage such activities. This book and its author strongly advise that

people wishing to play Texas Holdem Poker in any format check which

methods are legal in their country.

Texas Holdem Investing

A New Approach to Investor Education

I have written this introductory book for Texas Holdem Investing ™ after spending a

number of years in the financial markets and finding that many of the investoreducation programs miss some of the most important elements required for

successful investing.

Texas Holdem Investing ™ is not a “get rich quick” scheme for investing, nor does it

guarantee sure-fire positive returns. However, it does provide interesting

information regarding how to think about investing. Texas Holdem Investing ™ also

provides a framework to help learn about some of the main principles of investing

through the medium of Texas Holdem Poker.

To all of the readers of my website (www.texasholdeminvesting.com

), and of this

book, thank you for your time and attention. I hope that this document will provide

some measure of reciprocity for your support.

You have my permission to post this document, email it, print it, and pass it along at

no cost to anyone provided that you do not make changes to the content of the

document. In fact, I would encourage you to make copies of the document, with

the one request that you ask any recipient to sign up to the Texas Holdem Investing

™ mailing list at the website. In order to save bandwidth you can always direct

people to the download link at the website which is located here.

The right to sell this document for any monetary amount either online or as a

physical document is strictly reserved for the author and the author’s agents alone

as are all other media rights of reproduction for monetary and commercial

purposes.

If you wish to contact the author you can send an email to:

[email protected].

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Table of Contents

INTRODUCTION.....................................................................................................2

WHO IS THIS BOOK FOR?......................................................................................3

TEXAS HOLDEM INVESTING™ SKILLS....................................................................5

STEP 1. TEXAS HOLDEM VS INVESTING................................................................7

STEP 2. THE BASICS – TEXAS HOLDEM AND INVESTING.......................................8

STEP 3. THE TEXAS HOLDEM / INVESTING BUSINESS PLAN...............................12

STEP 4. MANAGING YOUR EMOTIONS...............................................................15

STEP 5. PROBABILITY...........................................................................................16

STEP 6. PERFORMANCE ANALYSIS – PREPARATION...........................................19

STEP 7. STARTING CAPITAL / DEPOSIT BANKROLL.............................................22

STEP 8. POKER AND INVESTING COSTS...............................................................24

STEP 9. GAME AND MARKET SELECTION............................................................25

STEP 10. BANKROLL / MONEY MANAGEMENT..................................................27

STEP 11. POSITION – A VITAL FACTOR IN INVESTING AND TEXAS HOLDEM......28

STEP 12. STARTING HANDS.................................................................................30

STEP 13. THE (INVESTMENT) FLOP.....................................................................32

STEP 14. AFTER THE (INVESTMENT) FLOP: (INVESTMENT) TURN & RIVER........35

STEP 15. MOVING FORWARD.............................................................................39

INTRODUCTION

Congratulations. You have made a wise decision in your investing career by reading

the introductory Texas Holdem Investing™ book.*

The Texas Holdem Investing™ method could help to set you on the path toinvesting wisely for the long term. At the same time it could help you to profitably

enjoy a hobby that is gaining popularity at an astonishing rate – Texas Holdem

poker.

The Texas Holdem Investing™ method describes how to develop a positive mindset

for your investing decisions. The active educational environment of Texas Holdem

poker is expected to teach investing habits more rapidly and permanently than

traditional passive methods of investing tutorials. At the same time, playing Texas

Holdem poker well could help you to build your investing capital so your investment

decisions are leveraging off greater resources.

It is impossible to forecast how much (if any) investment wealth you may generate

from the Texas Holdem Investing™ method. It will depend on how much time and

effort you put into following the method and practicing its principles regularly.

However, the skills that you can learn could help you to generate positive investing

returns and wealth accumulation over time with a reduced expected level of 

investment risk.

The Texas Holdem Investing™ method starts by teaching the principles of playing

Texas Holdem poker at low levels of betting, (referred to as “low limits”). With a

minimum of investment you can quickly become familiar with the rollercoaster ride

of wins and losses that are expected to eventually characterise your investing

career. This technique gives you consistent exposure to the experience of financial

loss and gain and how to manage these situations. However, this experience is

* Please refer to the Disclaimer on page 1.

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gained at a low monetary level that should not affect your wealth. This

type of experience is a powerful method of reinforcement learning that

can help you to experience and absorb the essential emotional aspects of 

investing. Most importantly, when you make a mistake with real money

in Texas Holdem poker or investing your subconscious registers it in a waythat makes it less likely to happen again. The Texas Holdem Investing™

method can help to provide you with inexpensive exposure to making such

mistakes in a way that few existing investing education programs can

match. Anyone can use this method, even with no previous investing

experience.

By practicing the skills shown in the Texas Holdem Investing™ method you

could learn how to potentially accumulate an investment portfolio

irrespective of what type of investment or asset allocation you choose to

specialise in – equities, bonds, and commodities are just a few examples.

This is because the skills acquired from the Texas Holdem Investing™

method are the fundamental skills necessary to increase the likelihood of 

investment success. Although the number of possible outcomes

encountered when playing Texas Holdem poker is tiny compared to the

massive number of outcomes in the investment market the principles

required for success in each field are remarkably similar. Therefore, the

principles you learn from the Texas Holdem Investing™ method could be

applied successfully throughout the rest of your investing life in any of the

wide range of investment markets.

WHO   I S THIS  BOOK FO R?

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130

IQ. Once you have ordinary intelligence, what you need is the temperament to

control the urges that get other people into trouble in investing.” – Warren Buffett 

This book has been written for anyone who would like to improve their investing

skills.

The investment education literature available often seems to fall into two

categories in terms of its view on peoples’ investing ability and therefore the best

way to provide investment training.

• Most people do not have the required ability to invest in a way that can “beat

the market”. Therefore, people should practise a simple form of investing which

is selecting asset classes and allocating capital to so-called index funds for therelevant asset classes which will replicate market returns.

• Most people do have the required ability to invest and achieve better returns in

the market. Therefore, people should learn how to “pick stocks (or whatever

other type of asset)” to beat the market.

The Texas Holdem Investing method fundamentally disagrees with both of the

above thought processes. It is both wrong and arrogant to state that no-one should

invest (or “only the professionals”) because it is impossible to “beat the market”.

Equally, it is both wrong, and dangerous to state that most people can develop to a

high level of the required skills to achieve better returns than the market.

The commentators who make statements about what type of investing is suitable

for “people” are generally speaking to their own agendas, and surprisingly so in

some cases.

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• John Bogle denounces stock picking and then recommends that you

invest in Vanguard index funds.

• Warren Buffett preaches the gospel of fundamental value based

investing where he concentrates his investments in a small number of 

assets and then says that most people should invest in diversified index

funds (less competition for Warren?)

• William Bernstein talks about the benefits of asset allocation and then

mentions that value investing as developed by Benjamin Graham does

work.

Everyone is likely to have some sort of capability to invest their financial

capital well given the correct education and training.

To demonstrate this, and answer the question “who can invest”, it isinteresting to analyse the diverse backgrounds of some of the great

investors. There is no cookie-cutter template in terms of background,

education, or career that these

• Ken Griffin (Citadel) is the Michael Dell of the hedge fund world having

started out trading convertible bonds in his Harvard dorm room.

• Steve Cohen (SAC Capital) did economics at Wharton but apparently

learned the ropes of risk taking with money while playing poker in

between lectures.

• Jim Simons (Renaissance Technologies) was a mathematics professor at

Stony Brook University.

• Bill Gross (PIMCO) initially joined the Navy and then played blackjack

professionally before moving into fixed income management.

• David Einhorn (Greenlight) majored in government studies in college, and then

spent two miserable years in investment banking before founding his hedge

fund with less than $1 million.

Competent investing of your own funds can be an excellent way of increasing your

net worth. Although investing well cannot guarantee untold riches you shouldn’t

deny yourself the chance to learn effective investing because of fund industry

advertising which says that Wall Street and The City know what is best for your

money. It is clear that they don’t given the excesses of the financial services

collapse that started in mid-2007.

Most people can and should try to learn the main elements required to make good

investment decisions regardless of the choice of investment vehicle. Texas Holdem

Investing™ can help you with this process.

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TEXAS HOLDEM INVESTING™ SKILLS

Texas Holdem Investing™ teaches a number of important investment skills

that are generally overlooked by traditional investor training:

•The importance of emotional discipline when putting money at risk ininvestments and how you can develop this discipline through practice

in the live “money at risk” environment of Texas Holdem poker.

• The importance of probability analysis in the context of making

investment decisions to put money at risk and how you can learn this

analytical skill using Texas Holdem poker as a starting point and

learning tool.

• The importance of risk management in the context of investing.

Traditional investment education generally focuses on how to makedecisions that lead to profitable investment decisions with either little

or no focus on how to deal with the loss-making situations.

Unfortunately, it is the loss-making situations that usually have a much

greater impact on investment performance than profitable

investments. Bernard Baruch, one of the great Wall Street investors

was quoted as saying “Even being right 3 or 4 times out of 10 should

yield a person a fortune if they have the sense to cut losses quickly”.

Texas Holdem Investing™ can show you how to acquire disciplined risk

management skills that you can apply to your investment portfolio.

• The importance of knowing how much starting capital is needed for

your selected investment strategy. Conventional investment

education almost never focuses on this vital element of your

investment approach. The majority of beginner investors are

influenced by the standard investment tutorial promotional material

stating that you can turn small amounts (e.g. $1,000) of investment capital into

large amounts (e.g. $10,000) in a short timeframe. It almost never happens this

way but as a result beginners start out with far too little investment capital and

then lose all their capital after a couple of poor decisions. Texas Holdem

Investing™ can show you how to determine an appropriate amount of startingcapital for your investment strategy and how you can accumulate some or all of 

it by playing Texas Holdem poker profitably.

• The importance of developing and using screening criteria with discipline for

investment decisions so that you minimise the emotional aspect of investment

decisions. Although such criteria are often described in conventional

investment education programs the tutorials seldom show how to acquire the

discipline to always apply investing screens. Texas Holdem Investing™ teaches

you how to develop your own screening criteria that suit your investment

program and then how to apply them in a consistent fashion which can bring

much greater stability to your investment process and performance.

This book presents the Texas Holdem Investing ™ method in 15 steps using the

following logical structure and should be read and studied in this order.

Step 1. Texas Holdem Vs Investing – An explanation of the remarkable similarities

between Texas Holdem poker and investing in securities.

Step 2. The Basics – Texas Holdem And Investing – Learn the fundamentals of Texas

Holdem poker and find out about the books to help you to accelerate your early

Texas Holdem poker and investment education.

Step 3. The Texas Holdem / Investing Business Plan – The Business Plans you need

and how to write them before you start playing Texas Holdem poker and before

you start your investment portfolio.

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Step 4. Managing Your Emotions – Understanding and managing your

emotions related to money and investing through the unique training

provided by playing Texas Holdem poker.

Step 5. Probability – How to use probability theory to develop a rational

system for analysing your investment decisions and Texas Holdem poker

play.

Step 6. Performance Analysis – How to prepare yourself to conduct

suitable performance analysis in both Texas Holdem poker and investing

and how to use it to continually improve your investment decisions.

Step 7. Starting Capital and Deposit Bankroll – Starting your Texas Holdem

poker bankroll accumulation and how to apply these skills to calculate and

start your investment capital.

Step 8. Trading Costs (And Bonuses) – Understanding and minimisingtrading costs.

Step 9. Game And Market Selection – How to select the types of Texas

Holdem poker games and then the corresponding investment markets that

are likely to suit your playing and investing capabilities.

Step 10. Bankroll / Money Management – Determine the amount of 

capital you would need for each game, session, and investment. How to

decide when to stop playing and converting this into “stop loss” rules for

your investment money management.

Step 11. Position – The importance of position in Texas Holdem poker and

the corresponding vital factor in investing – liquidity.

Step 12. Starting Hands – How to play Starting Hands in Texas Holdem

poker and then how to apply these skills to investment situations by

developing effective screening criteria to assist your investment decisions.

Step 13. The (Investment) Flop – Learn how to play (or not) on the flop and develop

your own strategies for the “investment flop”.

Step 14. After The (Investment) Flop: Turn & River – Learn how to play (or not)

after the flop and develop your own strategies for the after the “investment flop”.

Step 15. Moving Forward – The ultimate Texas Holdem Investing ™ trial which can

show you if you are ready to start being a successful investor and which could

produce starting capital for you investment portfolio.

People who follow the Texas Holdem Investing ™ method have the opportunity to

potentially become better investors while learning a great new pastime. If you

study and apply the Texas Holdem Investing ™ method diligently it could help to

guide you to create investment wealth more effectively and possibly with lower risk

than many other investor training programs.

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ST EP 1. TEXAS HOLDEM VS INVESTING

“All I bring to the party is twenty-eight years of mistakes”  – investor quote

in Market Wizards

Before you learn how to play Texas Holdem poker well and then find outhow playing this exciting game can help turn you into a skilled investor, it is

important to understand the reason why Texas Holdem poker is such an

effective medium for acquiring practical and usable investment experience.

Peter Lynch – one of the most well known US money managers – has

written that one of the most valuable educational tools for a would-be-

investor is playing poker. Other investment titans also have great regard

for the skills that an investor can learn from playing Texas Holdem. These

include:

• Bill Gross – the chief investment officer of PIMCO, the world’s largest

bond fund and generally regarded as the world’s top bond investor.

• Jeff Yass – a poker fanatic who founded Susquehanna, one of the

world’s largest options trading firms.

• David Einhorn – the founder of Greenlight Capital, one of the most

successful hedge funds of recent years, who finished 18 th in the World

Series of Poker in 2006.

There are many similarities between Texas Holdem poker and investing:

• They are both ultimately solo occupations.

• If you want to invest, trade, or play Texas Holdem successfully you

need to develop a business plan and learn the patience to adhere to

this plan.

• When practiced by serious people they are done with the objective of making

money.

• There are elements of luck in both fields in the short run but in the long run the

skill of the player / investor should be expected to result in financial gain.

• They both require a knowledge of probability and statistics to be able to

perform well.

• They both have unavoidable expenses associated with playing – in poker it is

the “rake” and the “blinds”, in investing it is commissions and platform costs.

• It is possible in both fields to learn a great deal about your performance by

analysing your wins (good investments), and even more so, your losses.

• They both require the player / investor to cope with risk and also to avoid risk

in equal measures.

• Finally, and in many ways most importantly, there is an emphasis on being able

to know and control your emotions when playing / investing to ensure that

decisions are as rational as possible.

Learning the skills that are required to be a good Texas Holdem player can help to

increase your understanding of how to invest sensibly, profitably, and with low risk

levels.

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ST EP 2. THE BASICS – TEXAS HOLDEM AND INVESTING

Texas Holdem poker is often described as a game that can be learnt in a

very short space of time but which takes a lifetime to master. The

“learning” in this statement refers to getting to know all the rules of how

to play an actual game. The “mastery” in the statement refers to achieving

a high level of knowledge about the strategy of the game.

Investing presents a similar problem for the new entrant. It is very easy to

learn how to buy and sell whatever financial instrument you are interested

in but it takes a long time to learn the skills required to do so profitably.

With these concepts in mind this section describes the game play of Texas

Holdem poker, the basics of investing in the markets, and then draws some

parallels.

TE XA S HO L DE M PO K E R BA S I CS

Cards: Texas Holdem poker uses a standard 52-card deck.

Dealer: A disk (usually white) moves around the table during the game.

This is known as the “dealer button” and represents which player is the

notional dealer for the game. The “dealer button” is important because it

dictates your “position” in the game which is a vital part of the decisions

you make. The betting starts from just to the left of the dealer and movesclockwise around the table.

Betting Structure: Texas Holdem poker games are generally structured in 3

ways:

• A “limit” game structure where there are limits on the size of bets that can be

made in each round and therefore for the whole game

• A “pot limit” game structure where the maximum bet that can be made is equal

to the amount of money that has already been bet at that point in the game

(referred to as “the pot”)

• A “no limit” game structure where there are no limits on the size of bets that

can be made at each round in the game.

When describing a game the terminology is usually along the lines of 1/2, 2/4, 3/6

etc. – 3/6 means is that the betting is done in multiples of 3 and 6 depending on the

round of betting and the minimum bet is 3. In this case the “Big Bet” refers to a bet

of 6 i.e. the amount of each raise in the last 2 rounds of betting in a “limit” game.

Betting Terms: In Texas Holdem poker there is 1 way in which you can decline tobet and 4 ways in which you can bet. These are:

• Fold – you are not betting at all or not matching any bets that have been made

and throwing your cards away.

• Check – you are staying in the game and not making any bet at this time. You

can only check if no-one else before you has bet and your check is outplayed if 

someone ahead of you bets.

• Call – you are matching any bet(s) that has been made before you.

• Raise – you are betting more than all players before you. You generally must

raise in multiples of the betting size for the round being played and there is

generally a limit on the number of raises that can happen per round of betting.

• Re-Raise – you are betting more than all players before you, including one or

more who had previously raised the betting level. If your re-raise is the final

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raise that reaches the maximum number of bets for the round then

you have “capped the betting” for that round.

Blinds: The player immediately to the left of the dealer posts the “small

blind” which is usually 1/2 (sometimes 2/3) of the minimum bet. The

player to the left of the small blind is the big blind and must post an

amount equal to the minimum bet. Without blinds, players could simply

wait for premium hands and not play every other hand since they would be

losing nothing for their patience. Therefore, the blinds force play to take

place.

Hand Rankings: The objective of the game is to achieve the best 5 card

combination according to the following hand ranking table.

Hand Cards Probability

(Odds)

Royal

Straight

Flush  

650,000 to 1

Straight

Flush

 

72,000 to 1

Four of a

Kind

 

4,200 to 1

Full House

 

700 to 1

Flush

 

510 to 1

Straight

 

250 to 1

Three of a

Kind

 

48 to 1

Two Pair

 

21 to 1

One Pair

 

2.4 to 1

High Card

 

PR E-FL O P RO U N D (RO U N D 1)

Each player is dealt two cards face down (your “hole cards” or “pocket cards”) and

the first betting round takes place. The first player to act is the player sitting to the

left of the big blind. In this first betting round, players have the option of calling,

raising, or folding. If the pot is not raised, the big blind can raise or has the option

of checking since the big blind has already posted the minimum bet. Each bet or

raise is equal to the minimum bet. For example, as per the Texas Holdem rules, in a

$1-$2 Limit Texas Holdem game, one player could bet $1 and another player could

raise to $2. Generally there is a limit to the number of bets that each player canmake per round – usually 4. Therefore, in a game of $1-$4 Limit Texas Holdem the

maximum that could be bet by each player in this round would be $4.

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TH E F LO P (RO U N D 2)

Three cards will then be dealt face up in the middle of the table. These are

the “community cards” which every player can use to make their best

poker hand. This betting round is known as the “flop”. The first player to

the left of the dealer button begins the betting on this round and all

subsequent rounds. Players may bet, check, call, raise, or fold in turn.

Once again, the bets are equal to the minimum bet which would be $1 in

the example above.

TH E TU R N (RO U N D 3)

A 4th card is then dealt face up which is known as the “turn” card. The

bets on this round are equal to the maximum bet. For example, in a $1-$2

Limit Texas Holdem game, one player could bet $2 and another player

could raise to $4.

TH E R I V E R (R O U N D 4)

A 5th card is then dealt face up which is known as the “river” card. Again

the bets on this round are equal to the maximum bet.

The winner is the player who can make the best five-card poker hand using

his two hole cards and five community cards. Players can use one, both, or

none of their hole cards to make the best hand. If two players use the five

community cards in the middle of the table they would split the pot

regardless of what their two hole cards are.

TE X A S HO L D E M PO K E R B O O K S

Clearly the preceding introduction to Texas Holdem Poker is just that – an

introduction. Therefore, you should consider acquiring some books to further your

education on the game.

The Texas Holdem Investing ™ website has a  page with links to some

recommended books.

TE XA S HO L DE M PO K E R DE CI S I O N FR A M E W O R K  AN D IN VE S T I N G

Having gone through the basic rules and gameplay of Texas Holdem Poker it is

instructive to point out the similarities between the decision frameworks for Texas

Holdem Poker and investing.

Although the following piece simplifies the nature of decisions in both Texas

Holdem and investing, it illustrates clearly the remarkable closeness of the mental

frameworks required in both fields.

Texas Holdem Decision Framework

1. Review your pocket cards – decide whether or not to “invest in the hand”

based on the cards and the other players.

2. Review the flop, turn, and river and also analyse the continued play of the other

players and decide whether to:

a. Stay in the game without betting to determine how it develops; or

b. Bet more money to increase potential pot size based on a favourable

development for your pocket cards; or

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c. Fold your hand and forgo your money in the pot based on a

negative situation for your pocket cards.

Investing Decision Framework

1. Review and research and investment opportunity – decide whether ornot to invest in the asset based on its characteristics and market

dynamics

2. Review the performance of the asset, changes in its fundamentals and

external forces, and market dynamics and decide whether to:

a. Stay in the investment with no further investment to see how

the asset performs; or

b. Increase your investment based on favourable developments

associated with the asset and / or market; or

c. Cut the investment and accept any losses based on a negative

situation for the asset’s performance

IN VE S T I N G BA S I CS

Learning the basics of investing is not something that can be achieved in as

short a space of time as the basics Texas Holdem Poker. After you have

selected the type of securities that you wish to invest in you should spend

a considerable amount of time in teaching yourself the fundamentals of investing in that type of security.

Ideally, you would learn the investment basics while beginning to play

Texas Holdem poker. Playing Texas Holdem Poker can help to ingrain the

fundamentals of investing psychology and risk management in your

subconscious while you can learn the technical basics of how to invest in the

securities of your choice. You can incorporate your investment learning program

into the business plan that you develop as described in the next chapter.

This book does not aim to teach readers the basics of investing because they are

different for each type of security, despite the fact that the psychology is often

similar.

Therefore, Texas Holdem Investing ™ website has a list of books that are

recommended as investment classics for an introduction to investing. They should

be incorporated into your general learning program for investing.

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ST EP 3. THE TEXAS HOLDEM / INVESTING BUSINESS PLAN

WHY  Y O U  N E E D  A  P L A N

The majority of people who start playing Texas Holdem simply get somemoney together, learn the basics of the game rules, and then start playing

in real money games.

The usual outcome of this approach is generally the loss of the initial stake,

followed by getting another stake together, followed by another loss, and

so on. In most cases the amounts involved are never huge but still – when

does anyone ever lightly give away their money so easily? However, one of 

the other outcomes – and this is crucial – is that the person is no wiser

about how to play Texas Holdem poker well.

Unfortunately, this type of haphazard approach is similar to the one

adopted by many people who decide to manage their own investments.

Many studies have shown that people spend more time deliberating on

their next clothing purchase than on a typical investment decision. This is

despite the fact that the amount of money involved in the investment

decision is often considerably larger than that in the clothing purchase!

This section shows you how to develop a comprehensive business plan for

both your personal investment strategy and your Texas Holdem poker

development.

There should be two main types of section in your business plan.

1. Sections of the plan that are standard for any type of Texas Holdem

poker player or investor. These address the fundamental aspects of 

your strategy regardless of the type of game or market that you select

to operate in. These fundamental factors will be broadly similar for all players

and investors.

2. Sections of the plan that relate to the particular Texas Holdem poker game type

or investment market that you select to participate in and will vary according to

the game and market features.

FU N DA M E N T A L P L A N E L E M E N T S

The fundamental elements that your business plan should address are:

1) Education Strategy – This is one of the most important and an often neglected

part of a business plan, particularly for investors. Educating yourself properly

about how to play Texas Holdem poker and how to invest is absolutely

essential. The solution is not to simply buy a few well known books, start

reading them, and start putting your money at risk straight away. You need todevelop a plan for acquiring the best learning material, embedding it into your

memory over time, and then slowly beginning to implement it with real money.

Also, probability theory and its applications is one area that should be a

fundamental part of your learning plan – again an area that is often either

neglected completely or learnt haphazardly. However, you have helped your

education plan by reading this book – now you need to follow through and put

it into practice!

2) Bankroll / Investment Capital Strategy – This will specify what your starting

capital is and how you plan to increase it. In investing, your capital plan will

need to link in with any savings plan that you have in place which will help to

increase your bankroll at a pace that fits with your investing progress.

3) Performance Measurement and Analysis Strategy – A vital part of your plan

which is generally overlooked in the rush to start playing poker or investing.

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This will need to address what measurements you should use for

monitoring performance and what tools you will need to record these

measurements regularly.

4) Hardware, software, and services requirements – For both poker and

investing it is important that you spend some time researching what

equipment you need to be able to operate efficiently. This part of the

plan should cover the following:

a. Computer(s) and monitor(s) needed with an emphasis on

ensuring that there is sufficient processor power and RAM

speed so that you can run as many applications as necessary.

This can be critical because some poker strategies involve

playing on more than one table at a time and for investing it

can often be useful to have two or more screens.

b. Software needed to achieve optimal performance from the

hardware being used. The main issue here is to ensure that

you have the appropriate Operating System e.g. Windows XP

that will run efficiently on your hardware and allow you to use

all appropriate application e.g. poker site downloads or

security monitoring programs.

c. Services that you need to sign up for to ensure that you can

smoothly conduct your poker playing and investing

particularly including the transfer of cash from bank accounts

through to accounts where you play poker or make

investments. In the case of poker you should set up an

account with one of the payment brokers. In the case of 

investing you need to sign up with suitable trading companies

according to your choice of investment market. You must research the

fees charged by these services to ensure that you choose the one that

provides the best value for money. However, it may not always be the

service with the lowest fees that is the best option.

GA ME / MA R K E T SP E CI F I C P O I N T S

The game-specific issues that your business plan should address are:

1) Adapting your skills to the specific game / market types you will operate in –

There are different skill levels and skill types required to play at different game

types e.g. limits in Texas Holdem poker. Playing at lower limits requires

developing an ability to stick rigidly to specific rules regarding when and how to

play no matter what run of results you are currently enduring. Playing at higher

limits (or in no limit) requires a greater level of inventiveness to allow you to

adapt to the wider range of situations that will arise. In investing the parallel is

adapting your skills to the specific market and securities that you decide to

trade in. For example, asset allocation investing is likely to require a large

element of rule-based decision making compared to trading in options or

futures.

2) Accumulating your bankroll to the specific game types you will play in – Lower

limit games will have different (lower) bankroll requirements to play. As

expected, you will also need greater bankroll to play at higher limits and survive

the greater volatility. In investing the parallel is acquiring capital that is

sufficient for the specific market and securities that you decide to trade in. For

example, trading equities on an unleveraged basis is likely to require less capital

than trading in options or futures.

3) Deciding on your limit / investment size movement plan – This will dictate

how you will move up or down limits according to the rate at which your skills

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increase and the rate at which your poker bankroll increases. This is

one of the most crucial elements of your whole business plan because

it is the area that the majority of players neglect to consider. Moving

up limits too quickly is generally the biggest bankroll destroyer of all.

Similarly, in investing moving up the amount of investment per trade

too quickly is likely to reduce the value of your investment portfolio.

You need to have a clear set of rules regarding how you can move up

limits / trade larger amounts of securities. Equally, you need to clearly

define why and when you will move down limits / trader lower

amounts of securities. These rules should be based on results

achieved over specified periods of time. In the context of investing

your “limit movement plan” will also incorporate when and to what

degree you will use margin (borrowing). Using margin is similar (but

not the same) to moving up to very high limits in Texas Holdem poker

and should only be done when considerable experience and bankroll

has been acquired.

4) Game selection plan – This will describe in detail how you decide to

enter a game based on the number of players, level of betting, and

other relevant factors. This plan may change depending on what limit

you are playing at. The corresponding plan for investing is how you

decide on whether or not to invest in a particular market given

prevailing conditions and expected news e.g. you are focusing on

investing in S&P500 construction stocks but you know that this weekthere are housing figures due to be announced and you have no idea

what they may be. Therefore, you stay out of the market for this

week.

5) Game playing plan – This dictates how you will actually play in the

games that you select to join. It will specify how you play before the

flop and after the flop to the end of the game. The investment parallel is a plan

for how you will conduct each investment / trade that you select – why you

enter the trade, what profit and loss targets you have set, and why will you exit

the trade.

ST A R T  Y O U R  B U S I N E S S  P L A N NOW

You need to continue with this book in order to learn the information that will

enable you to properly put together your business plan. However, it is vital to start

your plan straight away, even though you do not have all of the knowledge

necessary to complete it. This will ensure that you start your approach to Texas

Holdem poker and investing in a disciplined manner – a trait that can help your

results as you progress and improve.

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ST EP 4. MANAGING YOU R EMOTIONS

"More money is lost by players who know what the right thing to do is, but 

don't do it, than for any other reason.” – Ken Warren – author of The Big

Book of Poker 

Texas Holdem players and investors generally lose money for two main

reasons.

The first is that they do not take the time to acquire the necessary skills

and conduct the necessary planning before beginning to put capital at risk.

The second is that their emotions overcome the good decision-making

skills and plans that they have acquired.

UN DE R S T A N DI N G  Y O U R  E M O T I O N S

Achieving an understanding of human emotional responses in the context

of money at risk and in particular your own emotional makeup in this

context is one of the most important requirements for Texas Holdem poker

and investing. People generally make poor financial decisions and this trait

can worsen when the timeframe for making financial decisions is

shortened. The human mind is hard-wired to make decisions with the

burden of a number of biases that have been well-documented by the

academic field of “behavioural finance”. The decision-making of the

average Texas Holdem player or investor is riddled with these commonbiases that are difficult to overcome without a concentrated effort to

recognise them and prevent them from interfering with results. The

majority of investors and Texas Holdem poker players bring their normal

decision-making methods to putting capital at risk. However, normal

decision processes are often made with the luxury of time, a luxury which one does

not often have in the financial markets or at the Texas Holdem table.

It is the emotional aspects of Texas Holdem and investing that are typically the

most difficult to master. Decisions that involve putting our money at risk are

amongst the most emotionally-charged decisions that we make at any stage during

our lives. And more importantly, the emotional response to gains and losses in

situations where money is at risk, such as Texas Holdem and investing, are among

the strongest emotions that investors encounter.

Operating in a disciplined way according to your plan and achieving a good

knowledge of the Texas Holdem game / investment market can reduce the part that

emotions play in your future decisions related to putting your money at risk – both

in Texas Holdem and investing.

TE XA S HO L DE M PO K E R & E M O T I O N A L  T R A I N I N G

The advantages of using Texas Holdem poker as a training ground for your investing

decisions are twofold. Firstly, you can start at very small levels of your money at

risk - considerably lower levels than are possible in the majority of investing

methods. Secondly, you can practice very rapidly at lower levels and so train

yourself very rapidly about how to deal with your emotions in the situations of 

winning and losing money. Although some methods of investing do allow people in

certain countries to start at smaller levels e.g. spread-betting in the U.K., no form of 

investing allows you to go through the emotional rollercoaster of making hundreds

of investment decisions in a week or a month. Texas Holdem poker allows you to

do this because you can play upwards of 10 hands per hour on one table and can

even play more than one table in the case of online play.

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RE M O VI N G  Y O U R E M O T I O N S

The two main methods of removing emotion from your Texas Holdem play

and investing are:

1) Use rule-based systems for evaluating hands and probabilities as muchas possible and apply them rigorously regardless of what your

emotions are advising. You should note times when your emotions

advised a different approach that would have resulted in a bad

outcome and then build up a record of the hypothetical results of your

emotions. This enables you to see the negative effect of relying on

emotions and reinforce the need to stick with a rule-based approach.

2) If you suffer a bad string of results you should stop or reduce the level

of your playing. In these cases, human nature makes it almost

impossible to make rational decisions free of emotional disruption. In

Texas Holdem you “go on tilt” when you start to make poor decisions

because of bad results. A similar mindset can overwhelm you in

response to poor investment outcomes that may have been beyond

your control. Therefore, it is necessary to achieve the skill to realise

when you are in such a mental framework and cease to play or invest

so that you will not suffer needless losses because of emotional

interference.

The same approach is necessary when approaching your investment

decisions. Adhere rigorously to your rule-based decision process and

reduce / cease investing in the market if investment results cause your

emotions to interfere in your decision-making processes.

ST EP 5. PROBABILITY

“If you don't get this elementary, but mildly unnatural, mathematics of elementary

probability into your repertoire, then you go through a long life like a one-legged

man in a rear-end kicking contest. You're giving a huge advantage to everybody

else.” – Charles Munger – Vice Chairman of Berkshire Hathaway ( USC Business

School Commencement Speech – 1994)

Texas Holdem and investing both present you with uncertainty and limited

information about each situation that you analyse. In Texas Holdem you don’t

know what cards will come next or what exact cards your opponents hold. In

investing you don’t know how a company will perform after you have purchased its

securities or the condition of its internal business capabilities before you invest. In

futures trading you don’t know the intentions (if any) of the market participant that

has taken the other side of your trade.

Fortunately for Texas Holdem players and investors there is a rational method for

dealing with the problem of uncertainty – using probability theory.

Probability theory, which has become the bedrock of decision-making for Texas

Holdem players and investors alike, has a fascinating background. It came to exist

because of a problem that frustrated gamblers in the middle of the 17th century in

France. Chevalier de Mere, a keen gambler, posed the so-called “problem of 

points” question to Blaise Pascal, one of the greatest mathematicians of all time.

The question was as follows:

Two people, A and B, agree to play a series of fair games until one person has

won six games. They each have wagered the same amount of money, the

intention being that the winner will be awarded the entire pot. But suppose,

for whatever reason, the series is prematurely terminated, at which point A

has won five games and B three. How should the stakes be divided?

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Pascal shared this problem with another great mathematician – Pierre

Fermat – and their letters about the problem formed the basis for modern

probability theory.

EXP E CT E D VA L U E

Their letters also formed the basis for the concept of Expected Value – an

extremely useful concept for Texas Holdem and investing. Expected Value

in poker means that you think about your hand in terms of what would

happen if you had this hand many times over and over.

Essentially, you need to think of each hand in term of long-term outcomes

with that hand rather than the current situation in isolation. The

“expected” outcome may not always happen because an opponent will

draw an unlikely card and beat your hand but this should not alter the way

you play hands. Good Texas Holdem play focuses on ensuring that your

process for making decisions is fundamentally rational. This basis will

ensure that outcomes will invariably work in your favour in the long term

regardless of what happens in the short term because of “bad beats” – that

dreaded situation when your excellent hand is beaten on the last card by

somebody who started out with the worst hand possible.

Good investment decisions require a similar decision making process that is

followed regardless of past results and that focuses on long term

investment objectives. The swings of the market mean that the short term

outcomes of your investment decisions are very unpredictable but a good

decision making process will significantly increase the likelihood of long

term success with your investments. Peter Lynch has been quoted as

saying that for an outstanding investment track record you only need to be

right six times out of ten (and legend Bernard Baruch has also been quoted similarly

as noted previously).

CA L CU L A T I N G AP P R O XI M A T E DR A W I N G OD DS

It is vital that you are able to calculate the probabilities of success with your currenthand. For ease of use in the context of Texas Holdem it is better to calculate the

odds of success (referred to as “drawing odds”) – they can be converted into

probabilities if necessary.

The first step in this process is the ability to know what cards can improve your

current hand. This is often referred to as “counting your outs” and is described in

detail in the “Analysing the Flop” chapter.

When you know how many cards can improve your current hand you can then use

the following method to approximate the probabilities associated with your currenthand.

1) Determine how many unseen cards there are – in the case of a calculation on

the flop it will be 47 (52 – 2 pocket cards – 3 flop cards), in the case of the turn

46, and the river 45.

2) Divide the number of cards that will not help you by the number of outs that

you have determined. This will give you your drawing odds.

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EXAMPLE:

Consider the case where you have 4 cards of the nut flush on the turn.

There are 46 unknown cards = 52 cards minus your 2 cards minus 4 cards

on the board

9 of the unknown cards will help to give you the nut flush.

37 of the unknown cards will not help your hand

Your pot odds are 37-to-9, or 4.1-to-1, which rounds approximately to 4-to-

1.

Therefore, you will only bet in this situation if the pot is at least 4 times the

size of the bet that you need to make to stay in the game.

Now you will have a numerical basis for making your poker decisions based

on the expected value theory. It is important to remember that the odds

of getting dealt certain cards is only a probability. It reflects the

percentage of the time that you will “hit” the hand that you are drawing to

 – not the percentage of the time that you will win the pot. You may not

get a card that will improve your hand or another player may improve their

hand to a greater degree than your hand.

There are many odds calculator programs available for Texas Holdem.

These can monitor your hands and advise you of the probabilities.

However, some online poker sites and obviously all casinos will not allow

these programs. Also, there is no substitute for being able to perform the

calculations yourself. It will help improve your decision speed which can

be important because often there are limits on the time permitted to call,

check, or raise.

ME M O R I Z I N G IM P O R T A N T DR A W I N G ODD S

In Texas Holdem there are a number of important outcomes that you should be

familiar with in the context of your pocket cards e.g. on the flop the odds of 

“hitting” three-of-a-kind by matching your pocket pair on the turn, and river (this is

called a “set”) is approximately 22.5 to 1. Therefore, you should only bet if you are

getting a return of 23 to 1 on your bet.

It is important that you can quickly recall the probabilities associated with the

possible improvements to these situations. Ideally, you would memorise as much

as possible these important probabilities so that you will have more time to think

about your overall game strategy without having to perform mental calculations.

* Note that virtually the same odds will apply on the Turn since there are still 46 cards that are

unknown rather than 47 on the Flop.

ODD S  A N D IN VE S T I N G

As with many of the comparisons between Texas Holdem and investing, playing

Texas Holdem teaches the basic principle and it can then be applied more broadly

to the wider possibilities in the world of investing.

The difference is that in Texas Holdem it is very easy to calculate the odds since

there is a finite and well defined number of outcomes i.e. “outs” to the hand that

you hold. In investing the number of outcomes (or “outs”) and their associated

probabilities for a particular investing choice are not as clear or easy to calculate.

Based on your investment strategy and chosen securities for investment you must

define the “outs” relevant to each investment situation i.e. occurrences that will

improve the value of the security that you are holding. When you have determined

what your “outs” are for the investment you then need to work out the

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probabilities associated with these “outs” and what expected level of 

increase in security value they will cause.

ME M O R I Z I N G IM P O R T A N T IN VE S T I N G NU M B E R S

In investment it is also useful to be able to recall important numbersquickly in order to speed up your investment decisions. This is particularly

useful in situations where for some reason you need to make a quick

investment decision or if your trading style involves quick decisions in short

term volatile situations.

An example of such an important number that you should memorise is 72

in the context of the well known “Rule of 72”. This rule states that to

determine how long an investment will take to double in value you divide

72 by the expected rate of return e.g. if the expected return is 10% per

year it will 72 ÷ 10 = 7.2 years to double in value.

ST EP 6. PERFORMANCE ANALYSIS – PREPARATION

“If you can’t measure it, you can’t manage it” 

The above quotation is said to have been stated by Peter Drucker, a renowned

management consultant. It was targeted at the world of operating companies,where Drucker was pointing out that if a management team is not able to measure

an aspect of a business it will never be possible to manage it properly. Obviously

this is because management will be unable to ascertain how performance of that

aspect is evolving and how it responds to changes in strategy.

The more appropriate quote for Texas Holdem poker and investing is “If you don’t

measure it, you can’t manage it”. Apart from replacing "it" with "yourself" the

other one word difference is important – the first “can’t” is replaced with a “don’t”.

In business sometimes there are processes that are difficult to measure, and so

perhaps management have to come up with an alternative method formeasurement. No such excuse exists for poker players and investors. The statistics

that need to be measured to monitor and analyse performance are well known.

And typically it is relatively easy with a little of self-discipline, to both obtain your

results and analyse performance statistics using computer software.

One of the most important parts of monitoring performance is the preparation

necessary to ensure that a poker player / investor can adequately record results

and then convert the results into information that can be used for performance

analysis. Without sufficient preparation before starting to play poker and invest,

trying to monitor performance will be very difficult down the road.

And not measuring and analysing performance is likely to make it very difficult to

achieve positive returns from both Texas Holdem and investing.

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This section deals with the issue of making the appropriate preparations to

ensure that you can easily and effectively monitor your returns in as much

detail as required to help consistently improve your skills and results.

ON L I N E VS OF F L I N E

The recent arrival of internet Texas Holdem poker has led to a vast increase

in the number of people who now play the game. It has also led to a huge

leap in the ability of players who choose to play online to keep detailed

records of their performance. Online tools can extract and analyse your

hand history which can be downloaded from most online sites’ software

programs. Unfortunately, for players who prefer to play offline, or who

have to play offline for legal reasons one has to stick to the trusted

notebook and pen. But whatever recording and analysis tools are to hand,

preparation for your performance analysis is a vital part of your Texas

Holdem Investing ™ program.

TY P I CA L (BA D) PE R F O R M A N CE MO N I T O R I N G

The typical Texas Holdem player plays poker reasonably regularly, picks a

random a table at the casino / on the internet and then starts to throw

chips in. The amount won or lost is unpredictable from one session to the

next, with every good session goading the player into thinking that a

winning streak is in progress and that more should be risked. The ultimate

effect is predictable – a return to the average result – which usually resultsin a drop of bankroll to zero after allowing for the rake. Despite reading

numerous books on how to play Texas Holdem, the player never spends

time checking out past performance or looking at the behaviour of fellow

players.

Typical investors display the same careless attitude to tracking their progress. The

good investments (just like the good hands) stay uppermost in the mind and the

poor investments (just like the bad beats) are often forgotten.

However, it is generally the bad Texas Holdem and investment decisions that teach

us the most about what to do and what NOT to do going forward.

MO N I T O R I N G S O F T W A R E

In previous times Texas Holdem players and investors had to use the trusted pen

and paper to maintain records of and analyse their poker and investing history.

There was not much analysis that could be done with such records but it was better

than none at all. However, the computing power available to the average person

has changed all that. Now it is possible to analyse your complete hand history and

all of your investment decisions in detail .

Therefore, there is no excuse for the serious Texas Holdem player or investor to not

track their past performance rigorously and to learn from both good calls and

mistakes. Recording and analysing past performance not only educates you about

your behaviour and decision making skills. It also enforces discipline on your Texas

Holdem playing and investing – and we know at this point that discipline is one of 

the keys to success.

There are a number of software packages available for analysing your Texas Holdem

and investing performance.

PO K E R ST A T I S T I CS  F O R MO N I T O R I N G

Poker analytics software provides various statistics that demonstrate the pattern of 

your play. Some of the statistics will become easier to understand when you begin

to play but it is important to grasp the basics of them before you start. This can put

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you in a much better position to analyse your performance in your early

stages – the point at which you are most likely to lose money! The

following descriptions also provide some broad numbers regarding what

your statistics should be if you are playing well. These are rough guides

and will vary according to the type of game you play. In the early stages of 

your poker career there are 5 performance statistics that are most relevant

that can help you improve very quickly from a standing start:

VP$IP – V O L U N T A R I L Y PU T $ IN PR E-FL O P

This shows how often did you bet (excluding the Big Blind) or call a bet Pre-

Flop. This statistic shows how well you stick to the primary rule of Texas

Holdem – fold your poor pocket cards before the flop. Good players will

generally have a VP$IP of less than 20%. Beginners usually have VP$IP

levels of as high as 50%.

W$WSF – WO N $ WH E N SA W FL O P

This shows how many times you win if you see the flop and should be

approximately 35% for good players.

PFR% - PR E-F LO P RA I S I N G %

This describes the percentage of times that you raised before the flop. It

should be very low for Texas Holdem novices, possibly as low as 2%. As

you improve your Texas Holdem skills your PFR% should increase but

should not go above 7%.

W$SD – W I N $ A T S H O W DO W N

This shows the percentage of hands that you win at Showdown, and

therefore how effective you have been at folding weak hands on the Flop,

Turn, and River. As your play improves you will only play to Showdown with good

cards and your W$SD should move above 50%.

BB/100 – B I G BE T S  W O N PE R 100 H A N D S

This statistic is more relevant to limit games of Texas Holdem rather than no-limitgames. It shows how much you have been winning per 100 hands. Since it makes

no sense to measure your performance in individual hands, you must determine

your winning performance in relation to a more statistically significant number of 

hands. Although 100 hands is still a low number it is better than 1 or 10 for

measuring performance. This statistic takes your average winnings per 100 hands

and converts it into the number of “Big Bets” for the game of Texas Holdem being

played. A good Texas Holdem player should win at a rate of roughly 2 Big Bets per

100 hands – 2BB/100 e.g. a $5-10 limit player should win an average of $20 per 100

hands.

D I S C I P L I N E   I N MO N I T O R I N G

The most important part of performance analysis is having the discipline to

continually update your poker software with your hand history from all poker

games. In countries where online poker is legal software can typically import your

hand histories. If online poker is not legal in your jurisdiction then you will have to

rely on the trusted pen and paper for recording and then input the information to

the analysis software program. Having input this data it is then necessary to take

some time to analyse the change in your statistics and ensure that they are moving

in the correct direction. It is also useful to analyse any unusual statistics i.e. if your

winning statistics for a powerful hand e.g. KK, are lower than would be expected.

You should determine if there are any reasons for this unexpected performance and

correct any mistakes in your play if necessary. Only this type of discipline can help

you to learn from your past performance and improve from analysis of the results.

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IN VE S T I N G PE R F O R M A N CE AN A L Y S I S

In investing there are a number of important basic statistics that you need

to record in order to effectively analysis your investment decisions.

•% Winning Investments – The % of winning investments as aproportion of total trades made

• Average $ Win Per Investment – The average win per successful

investment

• Equity Line – In this context your “Equity” is the total amount of capital

that you have placed in your investment fund at the start of your

investing career. The Equity Line traces the growth (or otherwise!) of 

your Equity over time as a result of your investment decisions. Ideally

your equity line should exclude the effect of adding or removingmoney from your investment capital.

You will find that many investment software programs produce some of 

the more basic statistics on your investing performance. However, often

the best solution is to become familiar with the spreadsheet (Microsoft

Excel, OpenOffice Calc, Google Docs) – which will provide you with the

power and flexibility to analyse your investing performance in the most

appropriate way for both the market(s) you trade and your investing style.

ST EP 7. STARTING CAPITAL / DEPOSIT BANKROLL

When anyone is starting a new business that will involve risking their money they

will first put together a business plan. One of the most important parts of this

business plan is how much initial capital is necessary to fund the enterprise. One of 

the main reasons for this is that businesses generally require a certain amount of 

investment before revenues are generated. Therefore the business owner needs

sufficient capital to survive this period and possibly an extra amount for

contingency reasons.

Unfortunately people rarely apply the same rigour when entering the business of 

putting money at risk with Texas Holdem or investing. Part of the problem is that if 

you are starting a business that involves producing and selling goods or services it is

necessary to put thought into what will be required to start off both operationally

and financially. Texas Holdem or investing does not require you to produce

something and as such the starting capital requirement could theoretically be very

small. All you need to be able to do is have sufficient cash to place your first bet or

invest in your first security or asset class.

IN S U F F I C I E N T CA P I T A L / BA N K R O L L

This lack of planning is a flaw that affects many Texas Holdem players and investors.

Instead of viewing these activities as a business they are often treated like a game.

The lack of planning ensures that you will fail to appreciate the downward swings

that could significantly reduce your capital.

This usually causes people to begin Texas Holdem or investing with insufficient

capital. The immediate result is that when you lose money you start to think about

how much money you have lost. This in turn begins to affect your decision making

process, usually negatively. In general this manifests itself as taking greater risks

than should be taken in order to recoup losses. This kind of pattern can cause you

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to lose your starting capital quite quickly without you being able to tell

why.

In other cases insufficient capital will mean that if you are hit by a bad run

of cards in Texas Holdem or if you suffer an initial string of investment

losses that you lose all your capital before probability is able to work in

your favour. Probability would be expected to work in your favour in Texas

Holdem and investing if you make rational decisions. But it is necessary to

stay in business long enough for the laws of Pascal and Fermat to help you

out.

You need to consider the size of your Texas Holdem bankroll both with

respect to your overall bankroll and with respect to the bankroll you take

into each game. In both cases the amount you need will be dictated by the

size of the Big Bet in the limit games that you are playing in.

TO T A L BA N K R O L L / CA P I T A L

In Texas Holdem the size of your bankroll will be determined by two factors

 – a) how much spare money that you can set aside for your Texas Holdem

playing, and b) what limits you are playing at.

When you are starting to play Texas Holdem seriously you should start to

play at the $0.50 – $1.00 limit to ensure that you cannot lose too much of 

your bankroll through poor play when you are learning. Ideally at this level

your bankroll should be 500 times the Big Bet i.e. $500 in this case. This

should provide more than sufficient scope for you to learn and not lose

your entire bankroll.

Many starting players will start at a limit that is too high and with a

bankroll that is too small for the limits being played. The inevitable result

of this is total loss of bankroll without learning sufficiently about their game and the

need to inject new funds into their bankroll.

As you improve over time the bankroll required in terms of Big Bets can be reduced.

As a rule of thumb, if you have started out to play Texas Holdem as per this book by

the time you have increased your initial bankroll from $500 to $1,000 you should

then be ready to move to the $1 - $2 level where you will now have a bankroll of 

500 times the Big Bet. It is important to note that the $500 you have added to your

bankroll should be purely from playing games and should not include bonuses or

new bankroll. Using this as a hurdle ensures that you are giving yourself sufficient

time and game play to learn the skills necessary to move up a limit level.

It is also useful to keep in mind the principal of bankroll management when playing

sessions of poker rather than just hands – this is described in further detail in

section 10.

When analysing your investment bankroll requirement you should develop a similar

logic and process to the one above based on the risk levels of the securities that you

have selected for investment.

SE P A R A T E  Y O U R BA N K R O L L / CA P I T A L

The best way to deal with the capital you need for Texas Holdem or investing is to

set the capital aside into a separate account where you do not add to or withdraw

from it externally. When you separate your bankroll like this it lessens the tendency

of people to think of it as money that they can use to buy something or in the case

of losses money that they could have used to buy something.

BA N K R O L L  A N D  Y O U R BU S I N E S S P L A N

To conclude, in your business plan (see section 3) there will be a section where you

deal with the amount of starting bankroll / investment capital you need. Careful

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thought and analysis is required to arrive at this number because it will

dictate how you start your Texas Holdem or investing career.

In particular, your starting investment capital will depend significantly on

the type of securities that you intend to trade and the method that you

intend to use. Obviously, the higher level of risk and volatility associated

with your intended trading strategy, the higher level of starting investment

capital is required.

ST EP 8. POKER  AN D INVESTING COSTS

One of the most overlooked issues in both Texas Holdem and investing is that of 

“trading costs” and the effect that these factors can have on your long term

success. One of the key concepts to enable successful Texas Holdem and investing

is to understand the effect of small decisions in the long run and playing / investing

expenses are areas where this effect is significant.

This major gap in Texas Holdem and investing instruction material is critical and

causes many potentially good players to give up at an early stage because of poor

results that can be traced back to poor management of playing / investing costs.

In Texas Holdem games, you have to pay the “rake” to participate in a particular

hand. In all but two hands on the table you have the choice of whether or not you

want to pay the rake or not because you can choose to fold your opening hand if it

is poor. However, there are two occasions – the small and big blind – where youhave to pay the rake even if your starting hand is poor.

Consider playing $1/2 tables where the small blind is $0.5. On an average 10-hand

table, you have to pay a “cost” of $1.50 per ten hands to play and more if you have

potentially good starting hands. Therefore, every 1,000 hands you end up paying a

“cost” of $150 to simply sit at the table. Then consider that the average winning

hand in a $1/2 game will be approximately $18 you need to win 9 hands simply to

break even.

If you automatically decide to call the small blind in every case (which is highlyunlikely to be the proper thing to do) then you increase your basic entry cost to

$200 – now you have to win another 2 hands (11 hands in total) to cover your entry

costs. If you decide to play poor starting hands that only have a small chance of 

winning then you are continually increasing your playing costs.

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When investing, the trading costs dynamic is slightly different since there is

no direct equivalent to the blinds where you have to make a trade. You

have the choice whether or not to make every trade and only pay

commission on trades that you actually make (although in some cases you

must pay an annual maintenance fee for your trading account which then

becomes like the blinds you need to pay in poker). Therefore, the

objective you must meet when developing an investing plan is to ensure

that the average trade you take will at the very least have an expectation

of covering its share of trading and maintenance costs in addition to the

expected return that you want to achieve from your investing. If you do

not develop your investing ideas with this in mind investing costs will

significantly affect your investing results.

PL A Y I N G / IN VE S T I N G CO S T S RE DU CT I O N

It is important to pay significant attention to reducing your playing /

investing costs because, unlike the whims of the cards and the markets,

they are an aspect of your Texas Holdem and investing that you can firmly

control and have no excuse for neglecting.

Texas Holdem offers one major way of reducing your playing costs - be as

selective as possible when choosing which starting hands to play, in

particular when you are playing on the small and big blinds.

The scope of investment costs reduction will depend on the market and

security types that you have selected for your investment strategy. You

need to become familiar with the trading costs associated with your

selected market(s) and then determine a cost-reduction strategy that will

work while not causing you to make poor investment decisions purely for

the sake of costs reduction.

ST EP 9. GAM E  AN D MARKET SELECTION

There are a number of different types of Texas Holdem game formats available to

play, in the same way as there are many different investment markets that one can

choose to invest or trade in.

LE V E L S O F R I SK  A N D RE W A R D

There are different levels of both risk and reward associated with each of the

different Texas Holdem game types, and even within the different game types

depending on the limits being played. Each of the various investment markets have

different levels of risk and reward associated with them.

When you begin to play Texas Holdem you should start off with the game types and

limits that have the lowest levels of risk. This will ensure that you do not lose

significant amounts of your bankroll because of a lack of skill and experience.When beginning your investing career you should also exercise care in choosing the

initial markets that you invest in to ensure that you are exposed to as low a level of 

risk as possible until you have acquired the skills to increase the risk levels of your

investments.

IN CR E A S I N G R I SK LE VE L

There are 2 ways of progressing to a higher level in Texas Holdem – one is to stay

with the same game type e.g. limit and progress to higher limit levels, the other is

to move on to new game types that have progressively higher risk levels e.g. pot-limit or no-limit. In the markets you can remain in the initial market that you have

selected and increase the size of your investments or you can move on to other

markets that are inherently more risky because of the nature of the underlying

factors that drive the market.

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The way in which you increase your level of risk should be closely

connected with your bankroll and money management approach – both

for Texas Holdem and investments. Therefore, you need to consider your

overall skill levels and bankroll amount before changing limits. This is

discussed in more detail in the “Bankroll / Money Management” chapter.

MO N I T O R I N G GA M E S / IN VE S T M E N T S  B E F O R E  S E L E CT I O N

It is vital to monitor each Texas Holdem game that you are considering

playing in before you actually join in on the action. The obvious statistics

will be the number of players (which should be 8-10), and the average pot

size (which should be higher than average for the limit level which would

indicate more careless betting by the players but not too high which would

recklessness on the part of the players). Some games may look profitable

according to basic statistics but turn out to be unprofitable because of the

play of some or all of the participants e.g. they could be very “loose”,

always betting to the end of each game regardless of pocket cards,

resulting in some terrible bad beats for you.

Before making decisions regarding investment in a particular security (or

set of securities) you should also take some time to monitor the

performance of the selected security/ies in detail. Although the basic

screens that you use to select investments may be satisfied by an

investment’s performance, further examination of the underlying drivers of 

a security’s performance may make it an unsuitable investment.

For example, you may be using an investment screen that selects securities

which are good value according to your selected investment

measurements e.g. price-earnings ratio. This screen selects a “value”

security that you then analyse for 2 weeks based on its price

characteristics. However, its price characteristics indicate that it may be a poor

investment at this point in time because there are too many sellers in the market.

Therefore, you may decide not to make this investment.

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ST EP 10. BANKROLL / MONEY MANAGEMENT

Bankroll management (in Texas Holdem) and money management (in

investing) are the concepts that will keep you alive in the long run.

Unfortunately, this subject is often left until after the details of how to pick

stocks or play hands because it is not very exciting. It is boring because it

involves using your discipline to protect your bankroll but without it you

will find yourself digging into your pocket and taking from your living

expenses to fund your investing or Texas Holdem game.

The reason for the importance of bankroll / money management is that in

Texas Holdem you will never win all of the time and in investing you will

always have losing trades. Not only that, but there may be prolonged

periods where you lose money continuously – even when you are playing

or investing well – with a consequent disastrous effect on your bankroll.

The inevitable fluctuations in the results of your Texas Holdem games and

investment decisions mean that it is essential to have a bankroll that is

sufficient for the limits that you decide to play and assets you invest in.

The reason that learning to preserve your bankroll is so important is

because money you don’t lose can buy the same items (and assets) as

money you win. Furthermore, money that you don’t lose can be kept for

the hands and investments that go your way to maximise your returns.

BA N K R O L L  PE R GA M E / IN VE S T M E N T

Successful Texas Holdem and investing is only possible when you make

good decisions. You cannot make good decisions if some of the options

that you would like to utilise are not available to you because of 

insufficient bankroll in the context of a game or investment.

In Texas Holdem you cannot extract the maximum possible value from a hand

unless you have sufficient bankroll to bet correctly if necessary and therefore force

your opponents to bet also and increase the size of the available pot.

In investing, you should put more capital into a successful investment if you do not

have a sufficient amount left to outweigh the transaction costs of increasing your

investment size.

SE S S I O N BA N K R O L L MA N A G E M E N T  A N D “ST O P LO S S E S”

You will generally find in the investment literature that professional investors tend

to avoid placing too much of their investment stake in one stock position. Similarly,

as a control mechanism when playing at lower limits you should avoid placing too

much of your entire bankroll at risk during one playing session.

Having automatic triggers in your Texas Holdem and investment systems removes acertain degree of emotion from your decision processes. Given the dangers posed

to these occupations by emotional over-reaction this can only help to improve your

performance, particularly when you are still in your learning phase.

MO VI N G DO W N L I M I T S

It is important to ensure that part of your bankroll strategy is to move back down

limits if your bankroll has suffered because of poor play or a poor run of cards.

If for example you have moved to the $1-2 limit level based on achieving a target

bankroll of $1,000 and your bankroll subsequently falls below $1,000 you should

then move back down to the $0.50-1.00 limit until you have rebuilt your bankroll to

$1,000 (once again not including bonuses).

In general players do not have the discipline to follow such a strategy. It can be

emotionally difficult to drop down limits because it means that it will take longer to

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recover your losses. However, it is the only way to ensure that your

bankroll is protected in the long run. If you want to play Texas Holdem

long enough to learn how to apply the skills to investing then this is the

only option that will work.

IN VE S T M E N T MO N E Y MA N A G E M E N T

As with all of the comparisons between Texas Holdem and investing, your

money management rules in investing will be dictated by the investing

strategy that you have adopted and therefore may not be based on hard

and fast rules as with Texas Holdem.

The first decision that you need to make is the initial size of each

investment you will make. This is equivalent to selecting the starting limit

level at which you will play Texas Holdem.

You will need to determine you starting investment bankroll based on the

expected worst case scenario that could occur should you suffer a string of 

adverse investment results based on your chosen investment strategy.

You should analyse the potential performance of your intended investment

strategy based on historic market movements to determine what could be

the worst case outcome.

ST EP 11. POSITION – A V ITAL FACTOR  IN INVESTING AND TEXAS HOLDEM

“In the long run we are all dead” – John Maynard Keynes

In the long run all Texas Holdem players are dealt the same cards.

The main difference between consistent winners and losers in Texas Holdem is how

the two categories of player understand the value of the cards that they have been

dealt and how this value changes because of position on the table and the betting

actions of other players in the game.

Investors make selections from the same field of securities and their selections are

based on an understanding of the accurate valuation of securities. Deriving an

accurate valuation for a security is based on understanding the position of the

security in the investing cycle, the behaviour of other investors regarding the

security, and market level dynamics.

PO S I T I O N   I N TE XA S HO L DE M

Position used correctly in Texas Holdem is probably the most important tool in

helping you to understand the value of the hand that you currently possess and

therefore crucial in helping you to play profitably.

Position is significantly undervalued in Texas Holdem by many inexperienced and

poor players. Acting after other players gives you an informational advantage. By

observing the betting behaviour of the other players you will glean information

about the quality of the opposing hands still in the game.

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PO S I T I O N   I N IN VE S T I N G

The investing analogy to position in Texas Holdem is based on the time that

you take after initially considering investing in a particular security until

you actually make the investment in the security. If you take very little

time to make your decision you are effectively putting yourself in the

equivalent of an early position Texas Holdem player. You will have less

information with which to make a well-studied investment decision

regarding the value of the security and whether an investment provides

significant upside.

Investors who are in “early position” are like business entrepreneurs –

sometimes they can strike big time but they generally get overrun in the

white hot competition of an early stage market. In the stock market it is

safer and more profitable to wait and see what happens with newer stocks

(or a stock that is “new” in your analysis) otherwise you may end up taking

on too much risk. It is even more important to consider your investing

“position” in the early stages of your investing career when you are more

likely to make mistakes because of a lack of information.

PO S I T I O N  A N D IN VE S T M E N T “L I Q U I DI T Y ”

One of the key concepts related to investing is liquidity and this is

significantly influenced by the number of participants in a particular

market.

The concept is similar in poker with respect to the number of players in a

particular Texas Holdem game. Larger numbers of players in the game

mean it is easier to play with certain types of hands that have lower values

as starting hands.

In investment markets investing in a more liquid stock will allow you more flexibility

regarding your investment strategy because you can be more certain that if the

investment outcome begins to differ compared with your expectations it will be

easier to exit the investment quickly even if the investment quality is below

average.

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ST EP 12. STARTING HANDS

WHY NO T T O “G E T   I N VO L VE D ”

In Texas Holdem, as in investing, there is far too much education about

how and why to make decisions about “getting involved” in the game andabout how and why to make decisions when you are already involved (or

“committed” as it is often described in Texas Holdem). Unfortunately,

there is very little education about how and why NOT to “get involved”,

and how to emotionally deal with NOT being involved. There are many

reasons for this:

• Teaching about how not to play Texas Holdem or how not to invest in

securities is not terribly exciting

• It may appear to be more simple to teach someone how not to play or

invest and the perceived value and price of such education is low

• It is boring.

All of these reasons are incredibly wrong!

People do not realise that learning how to not lose money in Texas Holdem

and investing is at least as important as learning how to win money. In

fact, many of the great Texas Holdem players and investors would argue

that learning how not to lose is even more important than learning how to

win.

The starting place in Texas Holdem for ensuring that you do not lose

money needlessly is the way in which you play your starting hands. The

key analogy in investment is the way in which you analyse the investment

choices that you face and decide whether to commit your capital or not.

EVA L U A T I N G PO CK E T CA R DS & PO T E N T I A L IN VE S T M E N T S

The key to successfully playing your starting hands is to know how to evaluate the

strength of your pocket cards. The value of your pocket cards is dependent on the

following factors:

• Your actual pocket cards. The actual cards will determine the initial strength of 

your hand and the number of “outs” that you will have to improve your hand

when the community cards are dealt. Investment opportunities that have good

“outs” have a number of ways in which they can increase in value.

• You position and relative position (see “Step 11: Position – A Vital Factor”).

• Number of players at the table and number of players who stay in the game.

• How much money you need to invest initially. The amount of money that you

need to put into the pot will affect the game probabilities.

In investing, the equivalent situation to putting a value on your Texas Holdem

starting hand is deciding on whether an investment in a particular security is good

value for your investment capital. You should avoid investing in a security where:

• It does not have a wide range of “outs” to help performance improve (poor

pocket cards situation).

• You have not had sufficient time to assess the potential performance of the

security (poor position)

• The potential upside from the security if it performs well is not good (small pot

because of small number of players causing reduced pot odds)

• The investment required in the security to achieve a sufficient return is too

great (a pre-flop raise increases the initial investment required and reduces pot

odds)

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The difference between the two fields is that the rules for evaluating your

pocket cards in poker are easier to learn and apply than the rules for

determining whether an investment is good value.

SCR E E N -B A S E D EN T R Y

Deciding which Texas Holdem pocket hands to play and which investments

to make should be based on a screening strategy that will only create

situations for you that provide a positive risk-reward ratio in your favour.

You will find that such a screening strategy will mean that more often than

not you will be “sitting on your hands” during games of Texas Holdem and

during the investment markets.

The foundation to successful Texas Holdem play is having the ability to fold

poor starting hands. The majority of starting hands should NEVER be

played, particularly if you are in early position.

Similarly, in the world of investment choices the majority of investments

should never be selected for your portfolio, particularly if you are in the

equivalent of “early position” because for some reason your information

about the investment is of poor quality.

IN VE S T M E N T SCR E E N I N G SY S T E M S

One of the most amazing examples of screening in the world of investment

is the investment decisions of Warren Buffett in recent years. His

screening method focuses on only purchasing securities that provide

excellent value for the cost of investment in addition to a strong industry

position.

Unfortunately, there are no clear cut initial screening systems available “off 

the shelf” in the investment world in the same way as there are starting

hand tables in Texas Holdem. Instead, there are a number of screening system

guidelines available which can be used as a basis for your screening filter. Many of 

these guidelines are based on the investment strategies of well-known investors

who have made their methods public. There are also many screening tools

available on the internet - some of them free - that will enable you to develop your

own screening system.

Therefore, when you have gained the benefits of using a screening system for your

Texas Holdem starting hand selection, you will be ready to develop your own

screening system for your investment decisions. This should be based on a

combination of sound investment theory combined with your own attitude to risk.

As an example, Buffett would often make investment based on a “safety margin” of 

some sort for each stock he purchased. This would provide him with some

downside protection in the event of the investment not performing as he expected.

You need to decide if you need such a safety margin built into your own investmentdecision process and then develop your screening system appropriately.

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ST EP 13. THE (INVESTMENT) FLO P

“Cut your losses and let your profits run” – well-worn investment proverb

“There's no sin in being wrong; the sin is in staying wrong.”  – another(!)

well-worn investment proverb

The flop is the most essential part of a Texas Holdem game and it is the

stage where decision making skill is most important to ensure your success.

When playing starting hands you will only be playing hands that have high

values but when the flop hits the value of your hand can change

considerably so that you will end up playing a wide range of hands with

values ranging from excellent to terrible. It is crucial that after the flop has

been dealt you can quickly evaluate your current situation regarding being

favourite or otherwise and then play your hand appropriately based on

strict rules.

Every investment also has a flop element to it, and how to define the

Investment Flop is almost as important as knowing what to do at that

point. Knowing what to do at the Investment Flop is a critical part of 

successful investing because it will dictate in large part whether or not the

investment will be successful. Learning how to recognise what has

happened on the Investment Flop and react to it will be a significant factor

that influences your investment outcomes.

Unfortunately for both Texas Holdem players and investors, hope generallydominates rational decision making at the flop more than any other part of 

the game or investment process. If a player has two pocket cards that are

completely missed by the flop the hand should be folded. There should be

no hope attached to possible improvements on the turn or river – this kind

of decision making will only cause losses and emotional pain. This is also

true of investment, where if the outcome at the Investment Flop stage of the

process does not match your original expectations you should exit the investment.

The best way to avoid poor decisions on the Investment Flop is to continually

question the reasons why you are still in the game or investment at that point.

Your answers to these questions will help to show you whether you should exit atthat point or move on.

Great poker players keep asking themselves why they should stay in the hand and

look for a reason to fold. Great investors always question their security positions

and try to find reasons for closing their positions.

WHE R E   I S  TH E “I NVESTMENT  F LOP ”?

In Texas Holdem the Flop is easy to define as it happens at the same time in every

game. However, in investment markets you need to define your own flop for each

investment that you make.

In Texas Holdem, the flop is essentially when you see more cards and betting that

change the value of your pocket cards. Therefore, in an investment the flop would

likely be a particular event or length of time (or both) after which the underlying

criteria of the investment decision will have changed and affected the value of your

investment.

“M I S S E D” F L O P

It is ironic that most Texas Holdem books focus on what you should do on the “flop”

when you “hit” good cards when in actual fact this happens in the minority of cases.

Even more ironic is the way in which these books start off with flop strategies for

the strongest hands – by definition the hands that are least likely to occur in the

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real world. In the majority of cases you will be missed by the flop and will

not be hit by any cards that suit your pocket cards.

Therefore, it is vital that you can both realise when you have not been “hit”

by the flop and realise what you should do at that point.

As an example of realising when you have not been hit despite appearing

to be in a hopeful situation, if you have second or bottom pair with no

overcards you may think that you are not in a poor situation. In reality, if 

there is any action on the flop from your opponents you should simply fold,

analyse the rest of the play by your opponents, and look forward to the

next hand.

In investing the analogy to a missed flop is where you have selected an

asset based on certain criteria remaining in place or occurring and then

those criteria fail to stay in place and / or occur after you have invested.

As with a missed flop in Texas Holdem there are two options and they are

based on the movement of the asset value and underlying criteria after

investment. If your screening criteria are no longer relevant and the asset

price has moved against you it is essential to exit the position as quickly as

possible.

“H I T” I NVESTMENT  F LOP 

When you are “hit” by the flop in Texas Holdem poker it is likely that your

expectation of winning money from the pot has increased. The Investment

Flop analogy is a combination of:

a) Where the criteria you used to select an investment have remained in

effect or events have occurred that improve the investment relative to

your original criteria.

b) The actual movement of the security price in your favour.

In Texas Holdem, it is reasonably straightforward to elaborate the various strategies

that one should use for different types of flop.

It is not so easy to specify similar post Investment Flop strategies that will have as

broad a scope as the post-flop strategies in Texas Holdem. Therefore, it is

necessary to develop your own analogies between different flop types and

investment situations.

DO M I N A T E D HA N D S

Regardless of the way in which your hand has improved on the flop it is important

to watch out for hidden aspects of the situation that could destroy your apparently

good progress.

In Texas Holdem this could arise because although you have flopped three of a kindyour opponent may have flopped a flush or a flush draw. This type of situation is

the most difficult to get out of because although your own hand has improved (in

some cases significantly) you are dominated by another player and so have

effectively lost and are “drawing dead”. It is difficult to realise such situations but

you need to develop this skill and then act appropriately, usually by folding, if it

arises. As a rule, the following types of flop are dangerous because of the

possibility that your good flop hand is dominated.

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• 2/3 cards of the same suit

• 2/3 connected cards

• A pair on the board

• All high cards on the flop

In these cases you will require a particularly strong hand to play on,

especially if there is strong betting from any of the players on the table.

In investing, a similar situation could arise when company may have

announced excellent results, but there are some lingering doubts over

accounting methods that it has used to achieve these results – the classic

example that many investors can relate to is Enron, or more recently the

shares of banks such as Washington Mutual. There could be significant

doubt over the real strength of the results, in the same way that in Texas

Holdem poker your “WaMu” three of kind appears to be strong but has

been compromised by the flop helping an opponent to make an even

better hand.

Another example would be when a company performs well with respect to

its own operations but is affected by an external factor such as commodity

prices. A classic case is the airline industry, where good results and

efficient operations by the carriers are constantly compromised by

increases in oil prices.

In Texas Holdem it is easy to determine possible opponent hands that

dominate your own from rigorous analysis of the flop. In investing you will

have to set your own rules about what possible indicators show that

despite an apparently profitable situation you are likely to lose on the

trade.

C O M P L E T E HA N D S

Texas Holdem players do not flop complete hands very often because of the low

probabilities associated with such events. As a result, the general reaction upon

flopping a complete hand is one of overwhelming joy. Unfortunately, the wave of 

positive emotions can often have the effect of distracting the player fromperforming the analysis that is still necessary when flopping an apparently complete

hand. This loss of concentration can have a terrible effect on your overall Texas

Holdem results. A significant portion of a player’s overall winnings can often be

attributed to a small number of complete hands that are played well. It is essential

to maximise the value of these complete hands as much as possible. In addition,

sometimes your complete hand is dominated but because of your emotional state

you do not notice this. Such lapses of concentration can be catastrophic because

you bet far too strongly on your apparently complete hand only to suffer a

devastating loss when you are outdrawn.

Similarly, the investor will sometimes hit a home run with an investment. There are

numerous reasons why this might happen e.g. getting in to a stock soon after an

IPO when there is still plenty of upside – the classic example here is the early

investors in Google. However, as with Texas Holdem there is often a tendency to

allow the euphoria of the initial good result to reduce the investor’s ability to

maximise the value from such a hand. As with Texas Holdem, a small number of 

“complete hand” investments can often be responsible for most of an investor’s

overall gains. There are a number of examples of this phenomenon in recent

history e.g. Julian Robertson’s copper trade, George Soros’ sterling trade, and Li Lu’s

investment in BYD Company (look them up!) Therefore, it is as important to know

how to react effectively when an asset (class) moves hugely in your favour as it is to

know when a security selection goes horribly wrong.

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IN V E S T I N G – C R E A T I N G  Y O U R   O W N  F L O P  S T R A T E G Y

You will need to develop your own Investment Flop strategy that will take

into account the unique factors of your own investment situation by

allowing for:

- Type of market being traded

- Types of securities being traded in your selected market

- Time-frame of your investments

- Profit objectives and maximum loss levels that you have

specified

Developing your own Investment Flop strategy should form a major part of 

your business plan development. You should describe the strategy in

detail, writing down what range of  Investment Flop events can occur andwhat your response should be to each event type.

It should be an ongoing task that will require constant revision to deal with

changes in your investment environment and your own skills. In the same

way as your flop strategy will change as you move up limits, your

Investment Flop strategy will change as the markets, securities, and

methods that you trade with change in response to improvements in your

investment decision-making and results.

ST EP 14. AFTER  T HE (INVESTMENT) FLO P: (INVESTMENT)TU RN & R IVER

Play after the flop is generally much more straightforward since the strength of 

your hand and the potential strength of other players’ hands will be much clearer at

this point. Therefore, you must keep analysing the potential of the board for otherplayers and using probability rigorously to ensure that you make the correct

decisions.

Similarly, in investing after the Investment Flop event and / or timeframe has

occurred and you have acted according to your pre-set investment criteria, if you

are still in the investment it is likely that you have benefited from a good outcome

at this point. Therefore, it should be considerably easier to make decisions on what

to do with your position to either lock in your profit or possibly improve it.

TH E (IN VE S T M E N T) TU R N

In a poker game if you feel that you still have the best hand you should keep betting

strongly and raising if necessary. This will make it as expensive as possible for the

other players and ensure that your opponents do not get a free card to improve

their hands.

If this situation has occurred with an investment i.e. where the trade is still moving

in your direction and the fundamental factors supporting you staying in the trade

are still in effect, then you should increase your investment to maximise your gain

from the trade.

If you are worried about not having the best hand then you should check if possible

to ensure that you don’t put too much money at risk. However, you would

normally then have to call on the river to overcome the weakness that you

displayed on the turn by checking.

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The investment analogy to this situation is where you are at relative break

even on the trade but are not sure if the fundamental reasons supporting

the trade are still in effect. You should not put any further investment at

risk if you can help it until the next decision time point arrives. This will

allow you to see some more development of the investment to determine

if it is worthwhile.

Raising on the turn should generally be avoided since the betting amount

has increased and thus raising can significantly reduce your pot odds.

Unless an investment is already in major profit or has moved into major

profit at the point of the investment “turn” you should avoid significantly

increasing your stake in the trade.

THE (IN VE S T M E N T) R I VE R

AVOID WEAKNESS

The conventional wisdom in Texas Holdem is that the big money is lost by

hitting a great hand and then being “rivered”. For example, suffering a bad

beat on the river when your flush is beaten by the house of 2s full of 7s

which was from the player who played 72 offsuit from the pocket.

However, as with the conventional wisdom in many fields, this piece of 

“knowledge” overlooks another major source of big losses. That is the

situation that arises when you have the best hand but fold it on the river

because you think you are beaten. Inexperienced players lose huge

amounts of potential winnings (and lose their own part of a big pot)

because of weakness at this crucial stage of the game.

If you have used the principles in this book up to this point you will have been

playing only premium hands. Therefore, in the majority of cases it will be

reasonably safe to bet on the river in the expectation of winning.

LET YOUR PROFITS RUN

The investing analogy is that when you have invested in a good security and it has

moved in your favour according to your investment criteria you should continue to

invest in the security and remain invested to maximise your profit. Before you

begin to invest in a security the main objective is to ensure that you keep your

losses to a minimum through your initial investment screening criteria. When you

have invested successfully in a security and have gone as far as the Investment 

River  the main objective changes to ensuring that you maximise your profit from

having made a sound investment. These are the twin objectives of the famous

investment principle “cut your losses and let your profits run”. When you have

reached the Investment River with a successful investment it is vital that you “let

your profits run”.

Getting out of a poor investment at an early stage can save you from a limited loss.

Exiting a profitable investment before it has reached its full profit potential can be

much more disastrous – you are losing a potentially large upside extra profit on the

investment. For example, if you invest $1,000 in a security the maximum you can

lose through poor loss control is your initial $1,000. However, if you invest $1,000

in a security that moves significantly in your favour and then you exit the trade

when it is at $1,500 but the security eventually goes to $5,000 you have lost $3,500

of potential profit.

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EXIT WEAK POSITIONS

In a poker game if you have reached the river with a marginal hand and

there is a multi-way pot with many players remaining it is likely that your

chances of having the best hand are low. You would have reached this

stage because the betting action in previous rounds was low and soreaching the river was inexpensive. Therefore, in the face of any significant

betting action you should simply fold.

Similarly, if you have reached the “investment river” with a security which

has had marginal performance and is not supported by strong

fundamentals according to your screening methods you should probably

exit the investment. The lack of strong fundamentals will mean that the

security may be exposed to external events that could cause a fall in value.

ONLY INVEST FURTHER FROM STRENGTH

One important part of your strategy on the river is to only bet (or raise) if 

you want to be called by another player. Therefore, you should only bet

(or raise) when you think that you will have the best hand if you are called.

If you are not sure for any reason that you will have the best hand when

called then you should simply check. If there is a bet after you have

checked you need to consider the strength of the bet when determining

whether or not you are beaten. This strategy gives you the ability to

choose whether or not to bet on the river in view of your thoughts about

your opponent’s hand. If you were to always bet on the river you would

often lose to a better hand. This strategy can save you considerable

amounts of money since betting on the river when you are beaten can be

an expensive mistake if you repeatedly make it.

Similarly, when making decisions on the Investment River you should only increase

your stake in the security if you have a strong conviction that the future security

movement is reasonably certain according to your investment criteria and based on

movement of the security up to this point. Investing at this point is the most

expensive entry level and so should not be done without good reason since it

significantly increases the average cost at which you invested in the security.

EFFECTIVE SCREENING MEANS STRENGTH ON THE RIVER

The most important point to emphasise at this stage of a Texas Holdem poker game

is that you should bet on the river because you will have been playing with

premium hands to reach this stage in most cases. Unlike you, your opponents are

less likely to be playing premium hands. Undoubtedly you will suffer from some

outrageous bad beats at this point from inferior players who hit unbelievable hands

on the river. However, these should be outweighed by the big wins. You must

simply learn to accept these bad beats as a part of the game of Texas Holdem and

move on. It is important to ensure that you manage your emotions carefully in the

face of these bad beats. As mentioned previously, it is easy to “go on tilt” after

suffering a terrible bad beat – this needs to be avoided through the emotional

discipline that you have built up over the course of your progression through the

game limits.

When making your investment decisions at this “investment river” stage of the

process you will also be reasonably safe in the knowledge that you are invested in a

good quality trade that is moving in the direction predicted by your investment

strategy. Therefore, you should generally increase your investment stake to

maximise your profits from the trade.

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DEALING WITH BAD BEATS

There will be rare occasions where you suffer from a terrible “investment

bad beat” because of reasons that were completely outside of your ability

to predict or your investment method to deal with. Very few people who

had successfully invested in Enron coming up to October 2001 could havepredicted the fraud and stock collapse that was to ensue. The same is true

of many of the securities that people invested in during the recent high-

tech boom.

Unfortunately there is one major difference between bad beats on the

Investment River and on the Texas Holdem river. After the river the game

is over and this imposes a very effective risk control on your losses from

that game.

However, when a trade moves completely against you but still has value,the “investment game” is not over – you are still invested in the security.

In the absence of a compelling reason at this point you should end this

particular “investment game” and take the hit to your capital as a cost of 

business. Too many people in this situation go “on tilt” with the trade,

staying invested in the hope of the trade moving back in their direction –

often to watch it deteriorate further. Do not permit your capital to suffer

any more than necessary in these situations.

IN V E S T I N G – C R E A T I N G  Y O U R   O W N PO ST - F L O P  S T R A T E G Y

As with the Investment Flop above where we described how to develop

your own flop strategies based on the markets and trading style that you

are using, you will have to develop your own post-flop investment rules

and tactics.

However, as we can see from above, the amount of choices available to you on the

Investment Turn and Investment River  are considerably less than those on the

Investment Flop because after the Investment Flop you have reasonable certainty as

to your ultimate position and the situation with the asset you have selected.

Similarly, in the investment context, when you have defined your post-flop situationwhether by time or event you should have a better idea of the trade’s quality and

remaining potential. Therefore, the range of actions that you define should be less

than at the Investment Flop.

If you consider the potential scenarios and associated options available to you and

discover at this point that there is still a large variety of scenarios open to you it

may be necessary to consider whether you are actually at the Investment Turn or if 

you are still at the Investment Flop where there is a wider range of possible

developments in the factors affecting the trade and the future security price.

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ST EP 15. MOVING FORWARD

Investment literature has continued to be written throughout the wild

highs and lows of the last 10 years with a focus on how to select the

securities or asset classes that will help to generate a high return.

Unfortunately, such “systems” that are promoted by these books and

courses are of little or no use in the hands of an investor who has not

mastered the required emotional, quantitative, and risk management skills.

Even the best security selection system should not expect to achieve

accuracy of significantly above 60%. More importantly, and most

unfortunately for typical investors, it is the losing trades which causes the

greatest problems – panic in the face of large losses has destroyed many

an investor’s portfolio in very short spaces of time.

Texas Holdem Investing ™ shows you two of the most important lessons

necessary for successful investing.

The first is a new way in which to make your investing decisions based on

emotional discipline, good quantitative assessments, and a comprehensive

risk management system.

The second is a method with which you can learn to experience and then

to deal with the emotions associated with putting your money at risk and

then seeing both gains and losses. This is achieved through playing Texas

Holdem poker and relating your experience at the poker table to the worldof investing

Investing is not an easy subject to master no matter what training and

studying has been practised. This is because by definition financial losses

affect emotions much more than financial gains. Texas Holdem Investing ™

can help to steel your psyche to deal with these emotions. If you are in this position

you will be in the small minority of investors (including professional investors) that

have the ability to cope with the rollercoaster ride that is investing in the financial

markets.

Texas Holdem Investing ™ will not show you how to make millions in a short spaceof time or make asset allocation projections as many investing courses and books

promise. Instead, it will show you how to invest well by “losing well”. Ben Hogan,

the legendary golfer, once said about golf that “This is a game of misses. The guy

who misses the best is going to win.” Investing is identical to this. It is more

important to deal properly with your poor investments than to select the best ones.

This is because you cannot be guaranteed that you will always make good

investments, but you can be guaranteed that you will always make bad investments

at some point. After playing hundreds of hours of Texas Holdem poker, with the

final playing at levels where SERIOUS money (from your point of view) is at stake,

you will have learned what it is like to be in the crucible of investing. If you can deal

with your emotions in these situations when you could lose significant bankroll in

an hour you should be ready to make the step up to investing with confidence

whatever your style.

I look forward to hearing about your progress.

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