Understanding Trading vs. Poker: Taleb and Variance

Wow, this old post really struck a chord with me, haha. Transitioning from poker to trading definitely has its challenges, especially when it comes to understanding variance. I used to play online poker too, and the sheer volume of hands makes it tough to compare to trading decisions. I get why you’d feel that way about Taleb’s 70,000 trades; in poker, you can rack up those hands in no time.

the two disciplines having NOTHING in common, and trying to associate the two is like saying making a salad is analogous to a cooking 4 course turkey diner.

Variance is just as we understand it... a differential from the mean.

If you have a job with an average daily commute is 30 minutes does not have a correlation to poker just because you Monday commute is 40 minutes and your Friday commute is 20 minutes.

understanding variance in Investing is quite an easy task... you want to smooth out your costs by Dollar Cost Averaging and holding for long term gains.

Warren Buffet isn't a genius, he is a simpleton. He bought low and sold high!
He has held much of his portfolio for such an extended period of time, that it inevitably will be more valuable (thru network effect) than trying to arbitrage profit thru constantly trading. If you add to this the extreme inflationary effects of a weakening dollar, you can clearly see that the gains are significantly 'on paper'.

there are different disciplines of investing, such as hedging and arbitrage, but unless you are very attentive and managing (by the second/minute sometimes), your best solution is a buy and hold strategy using Dollar Cost Averaging. This extends to hard assets also.

the two disciplines have something in common, which is why a lot of trading firms use poker as a learning exercise or test

bankroll management, weathering variance, imperfect information, exploiting fish...

I would like to bring three quotes from the Oracle of Omaha:

We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don't. A public opinion poll is no substitute for thought. When we really sit back with a smile on our face is when we run into a situation we can understand, where the facts are ascertainable and clear, and the course of action obvious. In that case - whether other conventional or unconventional - whether others agree or disagree - we feel - we are progressing in a conservative manner.

Buffett Partnership Letter - January 1965

The above may simply be "old-fogeyism" (after all, I am 37). When the game is no longer being played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, etc. I have been scornful of such behavior by others in the past. I have also seen the penalties incurred by those who evaluate conditions as they were - not as they are. Essentially I am out of step with present conditions. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital.

Buffett Partnership Letter - October 1967

We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.

Warren Buffett's 1977 chairman's letter

Just to make a counterpoint to this:

So I read a book by Nassim Taleb about Trading: "Dynamic Hedging". And understood nothing.
Except: He wrote: "I am a trader with 70,000 trades on my belt life-time." And he meant: "So I know what I'm talking about! I am mad experienced!"

Cheers!

I read this as well, back when I was reading everything about options I could find. But it is not a book about trading. It is a highly mathematical treatise on vanilla and exotic options, as the subtitle suggests.

Trading is more about remaining in agnostic position untill you have an edge and only then betting. The larger the edge the larger the bet should be. Its not the goal to make many trades. Its higher skill lvl to make fewer trades with larger edge.

In poker you earn very, very small EV every time you make a decision.
Let's say you beat the pool for 10BB/100.
In 100 hands you make only 10% of a buy-in, supposing it's 100BB deep. (The buy-in would be equivalent to the trade position)
For every hand you play you make only 0,1% of a buy-in.
In trading if you have an 80% win rate with 1:1 risk X return ratio, you make 60% of a buy-in per trade on average.
In 100 trades:
80 wins
20 losses
80-20=60

Look at the difference of relative profitability of a trade VS a poker hand.

That's like if ALL of your hands go straight to showdown with 80% equity.
The variance in a 100 trades sample = the variance in 100 poker hands that went to showdown with 80% equity.