Accounting for Value in a poker hand

I was in a live(in a casino) $1-$2 blind no limit cash game. My position was in the big blind(BB). The player utg+2 raises to $15. He has played very tight, so I give him a range frequency of AQ,AK,JJ,QQ,KK,AA. Four other players call before it gets back to me.

(click to enlarge)poker-table-position

My pot odds are 5/1 or 16%. Given that i most likely have live cards(someone not having Q5 etc), unlikely to have reverse implied odds(The event that even if i hit what im looking for, someone beats me), and the unlikely event that the initial raiser will lay down top-top or aces, there is value in the call. The pot is $90.

The flop comes A 3 4 with two clubs.

Being first to act, I check. The original raiser bets $30. Two players call. So, pot odds to me are (90+90)/30 = 6/1 or 14%. In analyzing the value of the proposition, i think of ranges for each opponent. I keep the same range for the raiser. One of the callers probably has Ax and the other probably has a flush draw. This is of course speculative, but a probable occurrence.

If a 2 or 6 comes I win. But given the clubs, ill discount the 2 and 6 of clubs as outs to be conservative. So I have 6 outs. Using the law of 4, this means im approximately 24% to win. I call given a 24% of winning and a cost of 14%. The pot is $190.

The turn is a King non club. The board being A 3 4 K with two clubs.

I check again. The raiser bets $50. The other two players fold. This information is dynamic and changes the valuation.

First, its unlikely he has AA, KK, or AK. With two clubs on the board, and three people who called his flop bet, if he had AA,KK,AK he would bet more than 1/4th the pot to protect his hand. Its unlikely he would keep betting if he had an underpair like QQ or JJ with two overcards and three opponents. Given this, AQ seems likely.

Second, since the other players folded, i can add back the 2 and 6 of clubs to my outs.

I am receiving pot odds of approximately 5/1 or 16%. Using the law of 2, I have a (8*2) 16% of hitting one of my outs. Michael Price has a saying: “I like to buy the steak for 80 cents on the dollar, and pay nothing for sizzle”. In this scenario, I was paying face for the dollar, but getting the sizzle for free. What was the sizzle? It came in two places.

If the 18% hits, meaning a 2 or 6 rolls off on the river, i will bet something like 1/4th to 1/2 the pot and often get called. This is implied value.

There is also bluff value;although speculative and can go against you. If a club comes on the river, which is 11 outs,but will discount the 2 and 6 because that would be a value bet, then I can bet 2/3 to whole pot to induce a fold. Im able to do this because of perception. A flush is alot more visible of a draw than a strait. In this case, a 6 coming out would look harmless, while the 2 being visible, but unlikely a holding of mine. Most players in my situation would also be drawing for a flush in this situation, and im certain he perceives that.

Im getting the steak for face but getting another $390 at 18%, and $290 also at 18% for free; with the percentages being independent. The expected value could be calculated as (390*18% + 290*18%) – (50*64%) = 122 – 32 = $90. I call.

The river is a 9 non club. I check and he checks behind showing AQ. Just what i rationally expect to occur 64% of the time. To give an investing analogy, I was able to get a company with a good outlook and earnings with no contingent liabilities at book value.


Reciprocality in Poker & Investing

The game of poker is zero-sum. Once you account for the rake(the casinos take), it is worse than zero sum. This means that only the upper 40% make money. Including implicit costs of the game, such as opportunity cost, price of gas to get to casino, hotel room if staying for the night, the expensive food, etc; than the percentage of truly winning players is probably between the top decile and quantile.

This Darwinian atmosphere rewards adaptive players with skills in game theory, probability theory, deductive & inductive logic, intuition, and the ability to keep emotions grounded. It is a great breeding ground for people interested in the game of investing.

Who is your opponent?

It is typical within distressed & value-oriented hedge fund investors to take note of who is on the other side of their transaction. Einhorn has mentioned it at the beginning of his book. Seth klarmin has mentioned it in a few places. Joel Greenblatt has even alluded to the issue in his book. A wise older jewish man once told me “The secret to life is finding motivated sellers”. These points are well taken.

Ultimately, you have to reflect on the question “what is my edge in the situation”? You must keep your ego in check when asking these types of questions, and do your best to be a realist. As soros once wrote, markets are not kind to the ego.

Ill propose a hypothetical to the reader: you do an analysis on a security and believe it to be cheap, so your a buyer. In one case, there is a mutual fund which is selling because the security no longer fits within its mandate. In another case a shrewed hedge fund manager with 10% cash in his portfolio, is selling. There is value in this information.

The theory of reciprocality

In a poker book titled “elements of poker”, the author discusses reciprocality. Here is a quote:

“In the world of reciprocality, it’s not what you do that matters most, and it’s not what they do. It’s both. Reciprocality is any difference
between you and your opponents that affects your bottom line. Reciprocality says that when you and your opponents would do the same thing in a given situation, no money moves, and when you do something different, it does.”

Poker players think in these terms because of the amount of hands they play(hundreds or thousands a day). Professional poker players will often talk about the long run and expected value of their decisions. They do not get to emotional over one hand, as long as they played it well. In investing, the thought process and the bet are not in real time, and there is much greater ability to pick spots.

The author makes the statement :

“You can mine for reciprocal gold anywhere in the poker universe. Pick a topic, any topic. It can be as general as “food selection” or as specific as “Ace-king in the big blind at limit hold’em.” You dig for gold by looking for things that you could do differently in the future, things that will create or increase advantageous differences between you and your opponents, and thereby cause theoretical money to flow from them to you.”

This is such a beautiful statement. If you think theoretically as well as conceptually, it is true. Even to the point of exercise, eating healthy, and meditation. Over the long run, these activities will most likely have a positive impact on your overall results.

Some people may see this as overkill. That may be true to your situation. But for the professional money management community, im shocked that there is not more information and thought processes reflecting on the issue; how do i mine for gold and create an edge?

For money-managers making a living from delivering alpha, similar to being a top tier poker player, what is the mechanism which you receive alpha over another market participant? Again-keep the ego in check. Do you have more junior analyst, better dcf models, or better inductive reasoning? Every serious investor should reflect on their core competencies, and describe what qualities they possess that will claim them winners in the reciprocality of investing.

Christian Sgrignoli

Overconfidence Bias From “Elements Of Poker”

I often draw analogies to investing from poker.This is one quote that was worth sharing to an investment-minded audience. Hope you enjoy.

“We have been designed by natural selection to overrate ourselves at
poker. It all started with sex. Gal attracts guy. Guy attracts gal.
Genetically speaking, this arrangement works, so nature favors the
genes that rate to get us a date.

DNA is not interested in truth. If straight talk culminates in
conjugal consummation, your DNA is happy. If trumping up
your own attributes gets you laid, your DNA is exactly as happy.
Just as long as the deed gets done. It doesn’t even matter if you
believe your own story or not. If you have sex because you lied
and you know you lied, for example, “You look marvelous,” that
scores the same as if you have sex because you lied unknowingly,
such as, “I am funny.”

If we carry in our mind a false image of ourselves, and that
image gives us confidence, and the confidence itself increases the
probability that we will procreate, then it doesn’t matter that the
image is false. Delusion will be naturally selected. And that’s
what happened. In the same way that evolutionary pressure has
provided us with things like eyeglasses and ethics, it has also given
us the tools, capacity, and propensity to overrate ourselves, at many
things, and poker is just one of them.

With some games, like chess and tennis, you can’t get away
with thinking you are good if you suck, and you can’t get away
with thinking your opponents suck if they are good. There is
not enough slack in the perception of reality for delusion to take
root. Poker is not like that. We have The Gray Area. Once inside
it, we can convince ourselves of anything. Add to that the high
amount of self-worth currency at stake at poker, and we begin to
see the poker table as an environment rich in the nutrients upon
which delusions feed. Anyone with the naturally evolved human
tendency to overrate themselves and underrate others can go a
really long way with it at poker, even to the point of being a losing
player who thinks of himself as a winning player. The result is a refraction in the player pool. It turns out that 75% of all poker players think they play better than the other 75%.”

Update : CEDC & more

It has been a few months since last writing on the blog. We have been up to a few things; some old some new.

1. CEDC. Zach and I have followed Central European Distribution Co since July 2012. Our first analysis on the company’s common stock was published to seeking alpha on july 31 2012. The analysis can be read here : . In this analysis, we established a long position. A strategic alliance and backstopping of the 2013 convertible notes had been put in writing.

During the following months the alliance fell through, with the debt fast approaching. It was then that we sold our long position and went short. That analysis can be read here : . We did very well on the puts and more than made back what we lost on the long underlying. We spent many hours sifting through SEC filings dating as far back as 2008.

CEDC has been great for our learning curve. We both have become very interested in the special situation market. Hopefully, we will find the time to perform a distressed debt analysis. We already have our sites on a specific security.

2. CFA – Were both studying for level I. A good bit of the material is a recap from the finance undergrad degree. It is doubtful either of us will get in to top tier business school, so it seems like the best finance/investing post grad formal education route. Plus, I personally do not like the formal education market.

3. We are developing a business plan for a special situation newsletter. More to come in the following months.

Thanks to everyone reading this. Anyone may email us at

graham and doddsville

i was studying CFA, then decided to take a break from the EMH writing. It had been awhile, so I flipped through a few pages in “The intelligent investor” . In the appendix, the article “superinvestors of graham and doddsville” was attached. Something that ive been battling with since finance 420 class as an undergrad is EMH; the concepts of Market efficiency.

Here is a quote from the appendix:

“The washington post company in 1973 was selling for $80 million in the market. at that time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million. The company owned the post,newsweek, plus other tv stations. those same properties are worth $2 billion now, so the person who would have paid $400 million would not have been crazy.

Now if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people who think beta measures risk, the cheaper price would have made it look riskier. This is truly alice and wonderland.”

Buffet discusses the claim that EMH fans call investors that beat the index lucky. Buffet admits that there is some truth to this statement. He gives an analogy of coin-flipping. But the fact that the workers from Graham and Newman had such incredible track records speaks also to statistics.

CEDC quick update

Its been awhile since posting, Zach and i have been studying for CFA level I alot lately, and have not performed any security analysis.

Im planning to look further into whats been happening in CEDC during December. For those not aware, CEDC is a Deleware-Incorporated, European alcohol producing company. We did an analysis in July 2012. Shares were aprox $3, and we believed on an expected value basis given three different scenarios that shares were worth aprox $9. As of today shares sell a little below $2.

The corporate restructuring is not going as smoothly as we projected. The board and the interim CEO are having issues.
The dilemma between the interim ceo (Tariko) and the board is entertaining. He is writing open letters accusing the board of many things. In the up-coming recap analysis on CEDC, id like to establish Tarikos reason for bashing the company and its management publicly. Through Tarikos companies (Rouste trading and Russian Standard), Im assuming he wouldn’t mind the shares getting crushed for him to offer a tender. Management seems in favor of this, given there statements in the recent 8-k.

Stay Fly,

Cash Flow Christian, Aka CS Darkman

Michael Burry: A financial alchemist

Throughout the past century, there have been a select few investors that could be defined as an alchemist. In this select group, excelling at capital allocation is only a prerequisite. The other part is being able to think creatively and completely be able to take a perspective that is outside the current paradigm, on issues ranging from investing, history, and natural science (to name a few).. This ability is not something that can be learned through a harvard mba or any other form of formal education.

I believe Dr.  Micheal Burry is someone who fulfills this. His ability to think big picture and also analyze monotonous data separates himself. This may be part due to his as-burgers syndrome. If your read his reports, he is value-orineted, but also a “consummate rationalist” in a way similar to Soros. I would love to see him write the sequel to ” The alchemy of finance”- as i believe he is possibly the only person qualified to do so.

Please watch this video to understand my thoughts: