Friday, May 08, 2009

Explaining The Swings

Even after playing poker and fantasy sports for 6+ years, the short term ups and downs can be difficult to deal with. It's hard to take a long term view when several straight days of losses pile up.

People who invest in equities have a much easier time seeing the long run. (Well, maybe not recently.) While their portfolios change in value every day, they (should) have some stocks/funds growing in value every year, while other may be stagnant or lose value. In other words, they know - over time - they should come out ahead. The question is how much.

It's difficult to explain my fantasy sports adventures to a non-sports, non-gambling crowd. Most of these folks cannot understand how I can risk (or absorb) the losses. What's interesting to me is that the emotional cost of mounting losses always outweighs whatever actual dollar amounts I lose. (aka TILT.)

Let me reiterate that I am a lifetime winner (in both poker and fantasy) and I never play completely outside my bankroll.

While talking to a friend recently, I came up with a decent analogy between fantasy sports and any other business venture. Obviously, the goal is to create a profit.

My sister runs a "home party" business. This model has been used to sell several lines of products. Basically, she visits homes in a group social setting and demonstrates wares she has for sale. Then she takes orders (if any) for the products, on which she makes a commission (or markup).

In theory this is a good business model and my sister is one of the top sales generators for her product line. However, she has had many home parties that were poorly attended or had little sales potential. On these parties she lost both her money and her time invested: Travel expenses, samples and freebies, door prizes, etc.

Overall, my sisters business has been profitable, just like mine. She has had many more winners than losers, resulting in a "positive ROI".

The only difference is my losses stare me straight in the eye each night they happen, while hers are hidden in "the cost of doing business". Each business model operates on maximizing winning nights and minimizing losers.

It's just that her losers aren't posted in big red numbers on a spreadsheet.


Alex said...

The stock market has insanely more variance and greater chance of losing months, years, and even decades than either daily fantasy contests or poker.

Buffalo66 said...

Alex, I totally disagree with you.

Buy 100 shares each of 30 diverse stocks and after 25 years I'm almost certain you would not be busto. Maybe you take a loss - but not busto.

Give 100 big bets to 30 different poker players and I'm certain most (if not all) would be busto well before 25 years. The rake alone would kill them. (Even rake free, busto is likely.)

Alex said...

Well if you take 30 random poker players, I agree. But if you take 30 really good poker players, they'd all be winners every year if they're playing at the right stakes.

Buffalo66 said...

Buy 1 share of a stock/fund you think will do well over time.

Give one max buy-in (100bb) to the person you think is the best poker player in the world.

Which do you think is more likely to go busto? Many top pros say they have gone busto at some point in their careers.

Your original statement implies that investing in equities is much riskier than playing poker or fantasy. I disagree.

Alex said...

Any top pro that has gone busto has done so because they're trying to maximize profit, without sufficient regard to risk. If they dropped down in stakes, they would easily be winners ever year, and likely every month. The same can't be said for ANY investors, no matter how successful they've been.