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Gaming the Stock Market with Poker Smarts

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Do you play or watch poker? Even if you don’t, you will not regret learning how to apply poker wisdom to investing in stocks.

You can start with the video attached to this article or, for a quick and focused dive, check out this bit of applied wisdom I shared with my TAZR Trader members this week in a portfolio where we've successfully "gamed" the market and rode several stocks to new highs -- while all around us many expert players have said "You can't buy that! It's too expensive!"

When You Get the Best of It, Make the Most of It

That's actually a quote by "mathematics of gambling" expert Mason Malmuth, in a book of his I read many years ago titled Gambling Theory and Other Topics.

If you are familiar with the probability and statistics applications of poker to investing, you already know what Malmuth is talking about.

The randomness and viciousness of poker demands that you ruthlessly apply optimally-rational probability-based thinking to your decisions -- in addition to deep and active psychoanalysis of your opponents.

Some players are masters of poker-hand probability analysis and want very little opponent interaction, body language/facial “reading” or social gamesmanship.

These are the players who wear sunglasses and try to avoid most interaction at the table.

Then there are the true "behavioral scientists" like Daniel Negreanu. Since behavioral finance/economics are a pet project of mine -- and I started my Mind Over Money podcast this year in dedication to those fascinating arenas -- I am vastly interested in all related topics and Negreanu is an unparalleled practitioner of applied behavioral science.

He is so secure with his probability-weighted strategies for any given hand that he can spend the majority of his time and attention at the table analyzing, dissecting and “gaming” player behavior and interactions -- which is where the real difference and edge is found in games with a high "randomness component."

This focus and meta-awareness of the table, the deck, and the players gives him an uncanny ability to determine what cards his opponents are likely holding. It may begin with a hunch or guess, but as he verbalizes, jokes and sometimes taunts other players he can nearly always confirm his suspicions with an amazing degree of accuracy.

If you want to learn how to play poker, better or at all, watch or read Negreanu.

Now, what does this have to do with investing in or trading stocks?

#1: Know Your Probability Scenarios

#2: Play Your Opponents for Both their Strengths & Weaknesses

For us, this comes down to (1) Knowing our risk/reward in every trade and then (2) Gaming the institutional demand we expect at different price levels.

Short-term technical traders who use price charts and indicators, including volume, live and die by this analysis.

What I do with my short-to-medium term portfolio, where I may hold fundamentally-strong stocks through several quarterly earnings reports, is like a bigger version of the short-term technical analysis game, but with the added fundamental and behavioral components.

Cautious Players Who Get It Wrong, Curious Ones Who Get It Right

While big name fund managers like Ray Dalio of Bridgewater or Howard Marks, of value/distressed investment firm Oaktree Capital, come out waving red flags, we have to be able to discern if they are being overly conservative, once again, and missing the next leg of a big global economic cycle that could last for another 2 years.

Other successful “players” at the table like David Tepper of Appaloosa, Dan Loeb of Third Point, Steve Mandel of Lone Pine, Lee Ainslee of Maverick Capital, and Andreas Halvorsen of Viking Global are not wringing their hands about global macro worries. They are still “heads down, picking stocks” for the long-run of 2 to 5 years. Like Alibaba (BABA - Free Report) .

And it’s important to keep the history of this “table” in perspective too. There have been numerous high-profile calls for a market melt-down in the past 2 years. Jeff Gundlach and the perma-bear Albert Edwards from SocGen also come to mind.

But in all their macro analysis, they miss the simplest of factors: technological innovation + investment liquidity ($66 trillion tied to global equity markets) + stable economic growth and liquidity (favorable interest rates) = equities as the premier growth investment over many years of a long cycle.

Overcomplicating this equation only leads to missing great and lengthy rallies.

This has happened several times in my career trading growth stocks. And it is why I think we should still be buying growth stocks on the dips in this bull market to S&P 3,000.

Because I have little reason to believe this time will be different.

But if you want to dissect the behavior of one player who is convinced something is wrong and he’s throwing in the towel, check out the video that accompanies this article where I share the news this month of a fund manager who called it quits, citing how “wrong” and "almost impossible" the stock market is.

Why You Still Buy Alibaba for $200 and Beyond

I also share more insight on why I remain an investor in Alibaba shares at these levels. It seems every week Jack Ma and company reveal another market initiative that is sure to capture new and expanded sources of revenue in China and globally as they continue their dominant growth in multiple business segments.

And in the video, I also show you which fund managers were still buying or starting new positions in Alibaba in the second quarter.

Finally, I review what's going on with my "$200 Club" where I mistakenly sold Lam Research (LRCX - Free Report) on Monday and added NVIDIA (NVDA - Free Report) today. Thankfully, Facebook (FB - Free Report) and Align Technology (ALGN - Free Report) have not been removed.

Disclosure: I own BABA, NVDA, ALGN, and FB shares for the Zacks TAZR Trader portfolio.


Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service.


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