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Beating The Street And The Strip

By Tom Dyson, publisher, The Palm Beach Letter
Thursday, February 9, 2006

Is it possible to apply gambling strategies to stock market speculation?

Let’s ask Bill Gross, manager of a half-a-trillion-dollar bond fund...

While laid up in the hospital after a car crash, a young Bill Gross read Ed Thorpe’s book on blackjack theory, Beat the Dealer. Bill used the newfound knowledge to pay for his college education by playing blackjack in Las Vegas.

“What I learned there taught me several important principles that I’ve employed for the past 25 years at PIMCO, and I figure if they’ve worked for me, they can work for you too,” says Gross.

The Las Vegas “Strip” does have an awful lot in common with Wall Street. Both streets are founded on the principles of risk, reward, probability and randomness...and both make their living from fleecing suckers.

The terminology may be different, but the mechanics are the same. The commission fees collected on Wall Street are called tips in Vegas.

Investment banks are called resorts, and trading floors are called casinos. Las Vegas even has its own version of monetary stimulus - it's called free alcohol. Investment bankers, brokers and analysts are to Wall Street what strippers, hookers and dealers are to Vegas - they'll do anything to get your money.

That’s nice. But what I really want to know is – can you make money on Wall Street by using a winning gambling strategy? Although Bill Gross was a successful blackjack player, the casinos considered his techniques as cheating.

Poker is the only casino table game that can be consistently profitable without cheating. Unlike blackjack and craps, in poker you do not play against the house... you play against the other players. Therefore, if you are better than average, you win.

Poker is just like the stock market, except, instead of trading stocks on a computer screen, you trade poker hands with other players around a table. The similarities are amazing. You’ve got the interaction of greed and fear... the casino’s cut... ... risk versus reward... in fact, I’ll go as far as to say, if you can’t win at poker, you’ll never beat the stock market.

So how do you consistently win at poker? Easy. You play tight-aggressive at a low stakes table. Let me explain:

At a low stakes table, players are more likely to be impatient, careless, and inexperienced. This makes them loose. Loose players gamble more often, they ignore basic probabilities, they are more likely to play bad cards, and they don’t watch what their opponents are doing. Greed and laziness abound.

The average day trader has many of the same flaws... they over-trade and they take big risks on bad companies.

In poker, the way to beat these “day traders” is to do the opposite. You play tight. You wait patiently for the very best cards, and then you get aggressive. You make big bets and big raises.

This technique won’t work against experienced players gambling for big money. They’ll know you only play the best cards and they’ll fold the minute you make a bet. But in the nickel and dime games, you’ll get callers almost all the time.

I’ve been using this technique in the online casinos for years. It’s hard work, but it’s a successful strategy. Now let’s apply it to the stock market. Here’s what you do:

-Wait for the best trades. To paraphrase Jim Rogers, wait until you see the money sitting in the corner of the room, and walk over and pick it up. Don’t risk your money on investments you don’t understand or that you’re not sure about.

-When you find a trade you like, bet big. Back up the truck and ride it with conviction. “When the odds favor the player, it’s incumbent to make a bigger bet,” says Bill Gross. “Do you really like a stock? Put 10% or so of your portfolio on it. Make that idea count.”

-Fold when you are beat. Occasionally, your opponents will hit a lucky card. Occasionally, a new piece of news will hurt your position. Randomness and luck are an important part of the game. Know when to cut your losses, even if you liked the stock. Avoid the big loss that knocks you out of the game entirely.

In summary, patience is a virtue on both Wall Street and the Strip. Wait for the best opportunities... then back up the truck when you get one. And don’t go overboard with the free stimulus.

Good investing... and if applicable, Good gambling,

Tom Dyson





Market Notes


GOLD FINALLY RUNS OUT OF GAS

After one of the most spectacular short-term bull runs in its history, gold suffered a severe $20 drop on Tuesday… its largest one-day plunge in 13 years.

When an asset suffers such a sharp fall, it helps to stand back and take in the long-term view.

As the five-year chart of gold shows below, the precious metal enjoyed a huge $100 an ounce move in the past five months… it is far above its long-term moving average (blue line)... Since no asset can rise in a straight line, a correction is overdue.

Bottom line: Gold could fall all the way down to $475 an ounce and still be within its overall bull trend. And as we mentioned in the February 3rd editionof DailyWealth, expect more volatility in gold…


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