Wednesday, August 5, 2009

Taipan Daily: What Puggy Pearson Taught Me About Trading

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Wednesday, August 5, 2009
Taipan Daily: What Puggy Pearson Taught Me About Trading
by Justice Litle, Editorial Director, Taipan Publishing Group

Warren Buffett has said that being an investor helps make him a better businessman, and being a businessman makes him a better investor.

This is exactly how I feel about poker and trading. Being a trader has helped me become a better poker player and vice versa.

When approached the right way, poker is an excellent mind-sharpening tool. It’s like an obstacle course for your brain. To truly play well, and to further develop one’s skills over time, poker requires getting good at what I call “situational assessment.”

Situational assessment is all about sizing up a complex environment and making good decisions in real time. In no-limit Texas hold ‘em, there is a constant flow of factors and variables that have to be considered. A few years ago I came up with the acronym SPOT – stacks, players, position, pot odds, time and temperature – to help do this.

When you first sit down at a live table, run by a professional dealer in a casino setting, everything looks like a blur. (At least it did for me.) Things are happening so fast it’s hard to keep up. For the new player, it requires great concentration just to keep track of all the different things that seem to be happening at once.

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Now, though, I’m so relaxed at the table it’s almost like Neo in the Matrix, fighting Agent Smith with one hand behind his back. I can see everything that’s happening and make decisions fluidly and reflexively, even while listening to music or having a conversation at the same time.

This transition is a result of accumulated knowledge transfer. More specifically, it’s about transferring knowledge from the temporary and cramped storage area of the conscious mind, to the vast and permanent storage area of the subconscious mind.

It takes a lot of mental energy to consciously pull up a thought or a memorized rule – let alone three or four of them at once – and to not lose focus while doing so. Accessing the hard-wired patterns of the subconscious mind, however, requires little to no energy expenditure at all. If you’ve learned how to drive a stick shift, you know exactly what I’m talking about. At first, coordinating the movements of hand and foot and gearbox takes a lot of deliberate thought. Over time, it becomes second nature.

This is why an experienced poker player can be cool as a cucumber in the exact same situation where a newcomer is stressed and frazzled. The new player is burning up significant amounts of energy via the stress and strain of conscious mental recall. The experienced player is simply accessing stored patterns.

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Poker is also an excellent emotional teacher. It takes practice to control one’s emotions and remain cool in high stakes situations – like when running a large bluff, for example. The first few times I made a very large bluff at a very large pot, I thought my heart was going to beat right out of my chest. In my head I imagined that everyone at the table could hear it. Now the same maneuver is no more pulse-quickening than ordering a cocktail.

All of the above, and lots more, has deep application to trading...

The Life and Times of Puggy Pearson

What brought this topic to mind was an old quote from one of the all-time poker greats. I was going over some hand-written journal notes the other day, straightening out my files, and remembered how strongly I had been influenced by the words of Puggy Pearson.

Walter Clyde Pearson, a.k.a. “Puggy,” was born in Kentucky in 1929 and grew up in Tennessee. The nickname came from a childhood accident at age 12, giving him a nose that looked like a pug’s.

Puggy grew up dirt-poor with nine siblings. Thanks to the activities of Puggy’s father – a sharecropper and part-time whiskey bootlegger – his family had moved some 19 times before the age of 10. As Puggy recalled it, “we were so poor we had to move before the rent came due.”

Known as the “father of freeze-out poker,” Puggy dreamed up the basic poker tournament structure as it exists today. He won the World Series of Poker back in 1973, beating three-time champion and fellow Hall-of-Famer Johnny Moss. Back then the winner-take-all grand prize was a mere $130,000. By that time Puggy had truly honed his skills as a card player, having lived off his wits from the tender age of 13. He was believed to be the only person to attend every single World Series of Poker final table event, from the very beginning until his death in 2006.

Puggy was a colorful character to the extreme – relaxed and good natured, with a cigar constantly hanging out of his mouth. He was also a bit of a showman. Puggy liked to drive around in a 38-foot-long tour bus, with a large inscription on the side that said: "I'll play any man from any land any game that he can name for any amount that I can count." And then in small post-script: "Providing I like it."

Had he been so inclined, I imagine Puggy could have been a great trader.

Puggy’s Wisdom

Puggy also had the gift of brevity. The way he saw it, "Ain't only three things to gambling: knowing the 60-40 end of a proposition, money management and knowing yourself."

As an aside, I don’t really view trading as gambling – how can it be when there are traders who have made money 20 years in a row? – but then, the same could be said of poker. Top cash game players have an unerring consistency over the long run that can’t be challenged. And yet, there is a certain amount of “gamble” to both games... and to life itself. Are entrepreneurs not gamblers? How about the CEO who makes a big strategic acquisition that could either make or break the company?

But I digress...

Puggy’s wisdom has powerful application to trading – his “three things” are key to success in markets as well as at the poker table.

“Knowing the 60-40 end of a proposition” simply means always looking to put the odds in your favor. This sounds obvious, but is harder than one might realize in real-life application. There is the matter of knowing the odds in the first place – having a keen grasp on risk versus reward. There is the matter of implied odds – being able to dig deeper and assess hidden factors. And there is also the self-discipline factor... not chasing that weak draw that looks too tempting to resist.

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“Money management,” of course, is the lifeblood of the professional poker player and trader alike. Top poker players and traders keep track of their “bankroll” (i.e. risk capital) in the same manner that an aviator monitors the fuel gage or a scuba diver monitors air supply.

And, finally, “knowing yourself” is perhaps the most important thing of all... and, fittingly, the most challenging aspect of the journey. Many wannabe poker players and traders hit a dead end not because they are deficient in strategies and tactics, but because they never take the time to really and truly discover who they are.

Self-knowledge and self-trust are absolutely critical in high stakes situations – the sort of situations that show up in poker and markets all the time. How well do you respond under pressure? How much risk are you willing to take on? How much of a handle do you have on your emotions? What do you really and truly want out of poker... out of markets... out of life? And just how hard are you willing to fight for it?

These are all self-knowledge questions, of the sort for which pat answers simply don’t suffice. The good news is, in the quest for market mastery, the payoff for really and truly getting to “know thyself” can ultimately be far greater than mere financial success.

Warm Regards,


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