It’s well known that there’s a big crossover between those in investing/trading and those who like to play cards for money (bridge, blackjack, poker, etc.).
In his weekly note, Raymond James strategist Jeff Saut reminisces on his poker days:
I am familiar with cards, dice, and betting in general. While in college I supplemented the monthly stipend from my parents with the winnings from playing cards. The bluffing, the betting, the showdown was all great drama to me. Back then I learned the “one chip” rule. To wit, each time I won two chips I would put one of them into my pocket, not to be used again that night.
When I entered this business in 1971 I found that same kind of strategy useful in managing risk. In the stock market’s case, while the human natures of fear, hope, and greed still play a large roll, I tended to substitute card players with the personalities of stocks, the market makers, the Fed, Washington, and the politicians. Using such strategies I found that if you do your homework, and manage the risk, the odds of success in the markets are much better than a card game.
When you lose in the markets at least you get back most of your money (if you manage the risk) and the government shares in a portion of your losses via the capital gains/capital losses tax system.In a card game it tends to be basically all or nothing with each hand.
Uh, Jeff, that is really not proper play.
In poker you either keep your chips on the table, or you walk away and cash your chips in. If you want to limit your downside, you have to practice extreme cautionm simply not bet more than you’re willing to lose, even if you have a lot more on the table. But pocketing a few chips here and there as a hedge isn’t cool in any home or casino cash game.
In investing, of course, it’s different, so we can see how the rule applies. But still.
As for his take on the market:
Speaking of odds, what are the current “odds” for the stock market? Well, two weeks ago I suggested that despite all the often mentioned negative technical readings following April’s stock market peak, the markets were almost as compressed (read: oversold) on a short-term basis as they were when the bottoming process began in October 2008. Further, a week ago I opined the real upside challenge should come at the S&P 500’s (SPX/1064.88) 50-day moving average (DMA), which last Monday stood around 1100. The very next day the SPX “tagged” an intra-day high of 1099.46 and from there spent the rest of the week on the defensive; that is until “Friday’s Fall” of 2.9%. Of course Friday was option expiration expiation, so the downside dump was probably
Nonetheless, it did raise questions if my hunch that the 1040 – 1050 level would contain any selling is correct. Obviously time will tell, but as the equity market slid into its July 1st lower lows Lowry’s Selling Pressure Index was 17 points lower than it was at the May intra-day “lows.” As Lowry’s notes, “When Selling Pressure begins to consistently contract, despite new lows in the major indexes, such a divergence usually indicates the desire to sell has been largely exhausted; and, the end of the decline
may be near at hand.” Moreover, following the 90% Downside Days of June 22nd, 24th, and 29th quickly came a 90% Upside Day. Then on July 13th another 90% Upside Day was registered. Such sequences often mark the beginning of a rally. If so, the bulls’ case would be dramatically bolstered with a decisive move above the SPX’s 200-DMA at ~1112, with a subsequent confirming upside
breakout above the June 21st intra-day reaction high of 1131.23. Until this occurs, I am content to remain flat in trading accounts, yet continue to position favourable stocks for investment accounts.
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