The Game:I've been playing around with the poker app on my blackberry and recently I've been playing it more often - whenever I have some time to waste; on the subway, waiting at the doctors office, etc.
For those not familiar with the poker app, it's just a computerized no-limit texas holdem poker with 5 players where you start the app with $500 in the bank and play others with the same amount in their starting bankroll. If you keep winning and taking other people's money then you keep going to the higher stakes tables where the blinds go up and people have more money. If at any point lose all your money or go "all-in" and lose then you're OUT! You must restart the game and start with $500 again playing people with the same bankroll.
I should also mention that as other people go all in and lose, they are replaced with new players with a starting bankroll; so the money staying at the table keeps growing.
The Pattern:
At first you keep betting, you may win a couple of hands and lose a couple, but almost everyone has the same amount of money and if you go ALL-IN on a perceived good hand and someone is better then you lose everything and must start again. So you can imagine that at the beginning you will be OUT many times and must start over before building a big enough bankroll which is significantly higher than the other player. This way you can go ALL-IN more often and take bigger risks because even if you lose the hand you have enough to keep going.
Eventually after having gone bankrupt and having to restart I built a huge bank roll...... about $1 million!!! At this point, I dominate. Even if I'm not playing well and lose many hands I can recover by winning big on one large hand and keep going and eventually through enough hands I bankrupt all the other players and win with a massive bankroll.
The Trading Lesson - Capital is King
The dynamics of the game were very different when I had just $500 and to when I had $1 million. This is directly analogous to trading, if you start under capitalized you cannot take risks, and without risk there is no major return. But if you take major risks you may lose all your capital upfront and go bankrupt. But unlike blackberry poker, starting up again may not be so easy as it requires more hard-earned money, not to mention that the discouragement from the last loss effects your decisions!
In the poker game I went bankrupt over 30 times and had to start again with $500 before getting big enough to take more risks and work my way to $1 million. BUT when I had the big bankroll, I didn't have to play as skillfully as I had before, and I could risk more, which ultimately led to more money. It is the same in trading! It is very discouraging at first, especially if you start with little capital. That is why my advice is NOT to start under-capitalized. With an under capitalized account, if you can't take risks. With risk comes return, but also possibility of loss and your account should be able to handle a big string of losses should it occur. That is why.... Capital is KING!!!
As a side thought, with $500 in your pocket would you sit at a poker table where there were 2 players with $1 million bankroll and 3 others with $5 million??? The trading game is the same as the poker table, but you cannot see the other plays or their chips!! Institutional players have virtually UNLIMITED funds compared to small retail accounts. The barriers to getting ahead are high!!! This is not to discourage you, but to shed some light on the situation so we can play smarter.
The Life Lesson - Why the Rich Get Richer
As I pondered the trading lesson, I noticed the bigger lesson in life... "Why do the rich get richer?" Well there are many reasons, but without getting into all of them I think the same principle is at work here. With bigger money comes the ability to take bigger risks. Many big investors make big mistakes but still come out on top.... Look at Donald Trump!! This is because enough capital is there to risk many times over and the losses don't put a big dent in their overall investment capital. Eventually the right risk will earn a return many times higher than the sum of all the previous losses.
With this I leave you with some food for thought
If you had $100k how would you play it? Safe? Risky? Diversified???
Think about this: if you had the chance to invest $10,000 into 10 securities that were risky and each independently could give you 10 times your money or zero. Would go with this? Or think of it as gambling and choose a mutual fund with gradual long-term minimal returns?
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