Rounders

The other day I re-watched one of my favorite movies, one that I hadn’t seen in a long time.  I was thinking about the markets and metals at the time, and the combination caused me to come to an unforeseen conclusion:  Pretty much everything you need to know about investing in the 21st century is contained in the poker movie Rounders

If you haven’t seen it, Rounders revolves around the underground world of poker players in New York City, and the plotline is pretty simple-  a talented former player who has tried to move on to a more “upstanding” profession (he is attending law school) unwisely vouches for a childhood friend who runs up a huge poker tab that is ultimately owed to Russian mobsters. To save himself and his friend, the player is drawn back into the world of underground poker and has three days to work his way through various games to try and come up with the money. 

The real insights come about the observations of the game itself.  The writers spent two years getting to know the world of poker from the inside, interviewing and spending time with everyone from world-class poker players, to the “rounders” who make their living playing in the small-stakes games portrayed in the movie, to the casual games they played in all over the country from firehouses to VFW halls.  The core insight they gleaned is that poker is not “gambling” in the sense that everyone has the same chance to win (as statistically they should) but that poker is instead wholly a skill game, a brutal contest of strategy, will, and game theory where the casual players, given enough time at the table, would lose to the pros virtually every single time.  Indeed, though people steeped in the “investors” mindset would probably recoil at the comparison, poker is extremely similar to trading in that chance, dealing with the unforeseen, calculating risk and return on every hand and pot, and most crucially playing against the other players (or market participants) are all shared characteristics of the two contests.  Professional traders would have a great deal in common with professional poker players.

The running commentary of “Mike D” (played by Matt Damon) provides the central narrative of the lessons, or insights into this world and how it works, during the film. The writers wanted to distill some of the more powerful lessons they learned, and some of these quotes came straight out of the mouths of the professional players they interviewed during their research.

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Rounders starts with one of the best opening movie quotes of all time, and it sets up the entire premise:

“Listen, here's the thing. If you can't spot the sucker in your first half hour at the table, then you are the sucker.”

Wall Street has gone through various cycles of mass-participation by the public in stock investing, and public fervor for stocks has waxed and waned through the years.  The famous “shoe-shine boy recommending a stock as the harbinger of the 1929 crash” represents one peak of this public participation, and in the aftermath of that crash stocks were viewed as too dangerous for most people for a generation.  The “go-go market” of the mid 60’s was another peak, and the decline that followed discouraged yet another generation of people, but the cycle always returns.  In each and every case, the public IS the sucker at the table, but advertising and sales pitches have employed more and more sophisticated strategies and have effectively convince them that this is not the case. Greed always overwhelms fear eventually.

As a result, we see strange contradictions in ordinary people’s attitudes towards investing.  On the one hand, they will say “I don’t play in the stock market” and claim “trading is dangerous” because Wall Street is too slick, too powerful, and has too great an informational advantage and will beat the small-time trader every time.  On the other hand, they have no problem buying in to 401k’s or retirement accounts based primarily on stocks.  In their minds, those things are merely “prudent investing” and not “trading”.  For some reason, people hear the words “buy and hold” and “diversified asset allocation”, sold to them by uncounted television ads by the very same Wall Street firms they claim to distrust, and they have no problem gambling at the exact same casino because it has been sold to them as a responsible and prudent thing to do. 

These people don't seem to  realize that when they sign-up for that 401k through their employer or have their union bargain for additions to a pension fund invested primarily in stocks, they are unwittingly sitting down at the table to compete against the exact same players in the exact same arena as if they were personally trading stocks, despite their protestations otherwise.  These people would do well to look around at the entire financial system and ask themselves “who is the sucker at this table”.  I am pretty sure it isn’t JPM or Morgan Stanley.  For generations now, the investing public has been the sucker at the table, they just haven’t known it.

When the investing public plays (knowingly or unknowingly) at the Wall Street casino, they do so in the context of a carefully crafted fairy-tale that goes something like this:  “Freely traded markets will go up and down, but the prosperity they create will raise all boats over time so if I just buy and hold, I will grow my wealth eventually.  In the short-term, however, there will always be winners and losers and this is just how the game is played-  everybody places their bets and takes their chances”.  The fiction is that everyone at the table has a clean shot at winning. They don’t. 

"Why do you think the same five guys make it to the final table of the World Series of Poker EVERY YEAR? What, are they the luckiest guys in Las Vegas?"

Every trade is a zero-sum game, and for every winner somebody has to have taken the other side of that trade.  There are equal numbers of winning and losing trades, but these trades are by no means evenly distributed within the market.  Think about these headlines:

Goldman’s trading desk made money every single day for an entire quarter in 2013… 63 straight days of no losses 

Total number of trading days in 2013 in which JPM’s trading desk lost money:  Zero

Now most people think of all those high-powered firms and traders and would think “Well yeah, they are pretty cutthroat,  but the fierce competition between those folks is what makes a market”.  Does it really?

In one scene the two protagonists make a run down to Atlantic City where they unexpectedly run into a half-dozen other Rounders from New York sitting at a public poker table at the casino.  They all know each other and while they are exchanging greetings and insults, two regular guys at the hotel for a convention sit down at the table.  With their cheap suits and nametags, they might as well have targets painted on their chests.  As the pros exchange knowing smiles, the narrator tells us that these poor schmucks have no idea what they just stepped into.

“We're not playing together. But then again, we're not playing against each other either. It's like the Nature channel: You don't see piranhas eating each other, do you?”

The two conventioneers think they know how to play because they sit in on a Thursday night game back home.  They have no idea that, through the ruse of an “even-odds game”, they are going to be harvested by the sharks at the table no matter what cards they draw.  And all of the pros at the table are holding to another hard and fast rule:

“It's immoral to let a sucker keep his money”

It will be interesting to see what happens when the current big-stakes game of financial liars poker is done.  We have pyramids of market bets by the big financial players, topped by even larger pyramids of derivatives bets.  All of the players at the table are the risk counterparties to all of the other players at the table, and the understanding among them is that if they all lose- if the markets they are harvesting so aggressively get away from them entirely - the US taxpayer (via the Federal Reserve) will make all of them whole again if anything goes wrong.  They have every reason to believe this will be the case, because it has always been so.  From Long Term Capital Management to the Bear / Lehman / AIG fiasco of 2008, the US taxpayer has always made them whole when things go wrong.  But is this an endlessly viable option? 

It seems to me that the financial system and their partners the Federal Reserve are backed into a corner.  If the Fed allows interest rates to rise, the interest on the 17 trillion dollar national debt (against just 3.5 trillion per year in tax revenues and a trillion-plus yearly deficit) would begin to accelerate, compounding upon itself as the debt is rolled over and could quickly undermine what remaining confidence there is in the US dollar. To keep interest rates low in the face of a market that doesn’t want to buy any more US debt, the Fed has become the buyer of last resort and has now taken 4 trillion dollars on its balance sheet already.  If they keep taking on more, their own credibility will be undermined. Damned if they do, and damned if they don’t. 

And backstopping the whole thing is the American taxpayer, the people whose productivity and labor ultimately have been pledged as collateral for the entire financial circus.  The problem is that these people are knee-deep in debt, they are watching their purchasing power evaporate thanks to the Fed. They‘re just hanging on by their fingernails and praying that their paltry 401k bet will come through.  The situation they are in, if this can be believed, is even worse than the Fed.  They will have zero tolerance politically for yet another bailout of the Wall Street gamblers who treat them like marks then demand their  money to be made whole when the schemes go belly-up.  The public has been squeezed dry to the point that there is simply nothing left. 

"I've often seen these people, these squares at the table, short stack and long odds against them. All their outs gone. One last card in the deck that can help them. I used to wonder how they could let themselves get into such bad shape, and how the hell they thought they could turn it around."

At what point will these people look around the table, realize they have been suckered in the most egregious fashion, and simply get up and walk away?  After all, the game can only go on as long as they are still willing to ante-up.  The day is coming when the public will either push away from the table or they will be out of chips. Either way, it’s game over.

Keep stacking.

72 Comments

metalsbyamile's picture

No way Im not sayin it

Edit: No way I'm not sayin it is of course a double entendre so.......

I'm first after less than 24 hrs!!

Just joined, great article.

I remember when a "rounder" was a stock promoter in NYC. Not a good label to have as I recall.

ag1969's picture

Second

Great job Pining.  Rounders was one of my favorites too. 

The Judges Game

Gold Dog's picture

Third?

I am honored.

Another great piece P4! Things could get pretty damned dicey pretty damned soon.

Your friend,

Dog

silver66's picture

Metalsbyamile

Man up for gods sake, there is tradition to up hold. Chiildish and immature, but tradtioin none the less :-)

So I guess that makes me thurd

Silver66
P.S. welcome to the board

Pining 4 the Fjords's picture

metalsbyamile- The First Club

My man, you don't know what you are missing.   "First" in Turdville is a huge thing. 

Behold:

Turd Ferguson's picture

Excellent post, Pining

MODERATOR

Just terrific on top of similarly excellent weekend reading from JY and AM.

We're all very fortunate to have you here!

Turd Ferguson's picture

Pining!!

MODERATOR

I've never seen that before!

That is absolutely, unbelievably GREAT! Prize-winning!!

I'm saving that thing and I'll be sending it in reply to every dbag who emails me to tell me how childish the "first thing" is.

Hammer's picture

When's the musical coming out

When's the musical coming out ? :) I'm sure we have the script writing and musical talent here to take it to Broadway.

We need catchy tunes and a slick title. 

opticsguy's picture

The stock market as measured by the Dow has beat inflation by

1.5% a year since 1900.  Considering that the failures are removed from the Dow periodically (GM?) in real life it is probably worse.  That's a lot of risk (decade long bear markets for instance) to beat inflation by 1.5%.  Considering that your 401K probably takes 2% a year in fees, you can see where this is going.

Not only that, according to the Dow index, McDonalds is an industry, as is Goldman Sachs, and JPM and Visa.  Lots of wealth they create...

metalsbyamile's picture

Pining 4 the Fjords

With such a great disertation of 'rounders' coupled with a 'first' admonition I've learned a lesson.

But to digress, your article is somewhat suggesting rounders are indeed stock market players. After all derivatives are just fantasy paper pushed upon the market by thugs without a conscience -not unlike what the NYC crowd thought of the lower end paper pushers who moved penny stocks in Boiler rooms.

Boiler Room-Now there was a great movie

Gold Dog's picture

Pining!

I love the Firsters ditty!

&^$$(@^ <---- Secret Handshake in written form.

Your friend,

Dog

tyberious's picture

Pining

Simply FANTASTIC!!!!

What a great place!!

Mudsharkbytes's picture

It's great and entertaining, but…

…Pinings Dr. Seuss parody was posted here previously, sometime during the first year of TFMR. I remember it well.

Pining 4 the Fjords's picture

Thanks TF !

And Mudshark is right, I posted that about a year ago in response to the grinchy types who don't like our venerated traditions and rituals.  

I suspect it will get more ht than the article I sweated over, but such is life!

lakedweller2's picture

I Tried

Back about 2007 or so, when getting tired of no regulation, no level playing field, and no one being indicted for anything, I wrote the SEC and CFTC "again".  This final time was a request to "level the playing field" for at least me.

In my final emails/complaints, I asked that since neither were willing to enforce any laws, particularly against the Banks, Fed, Treasury, Congress, the Administration, Hedge funds,  and since I was only one insignificant person, could they put me directly in touch with those that were manipulating the markets so that I could be an "insider" and know the "code" or "codes" in advance of the trading day like those in the suspect groups above.  I would promise to be discreet until such time I amassed great wealth.

I received no responses and considered those my last attempts at thinking the system could be repaired or that it could be fixed through those regulators given the "public trust" to protect us.  We are openly on our own.  They have an agenda which does not include the guy on the street.

Great post Pining

argentus maximus's picture

Very good article

Very good article Pining.

Even better "Who-ville" post after it!

About Wall Street and it's insatiable money-predation:  There is a conveyor belt of new people always growing up and achieving earning and taxpaying age, so demographics ensures a supply of fresh meat for both Wall St. and the greater state. Actually this probably applies everywhere on the planet in one way or another. But due to demographic changes, the supply of "freshies" is not constant, and this messes up the predator-prey relationship which persists.

Consequently I have had a lurking thought that one of the reasons for markets falling, or not rising, is the relatively fewer marks (as in suckers) standing in line behind the boomer generation to take their place as main loser to Wall St and big .gov. the boomers have to sell and go into cash at some stage, no similar generational bulge is behind to take up the slack in "contributions". So stocks just happen to go down until after the last boomers have sold cheap. (The present of new highs in stock prices is illusory, since hidden inflation has raised the entire trading range within which stock prices fluctuate.) I imagine that economists would say that stocks fall because boomers are selling. I prefer to think that stocks are marked down in advance of boomers selling.

Anyway thanks for the article.

foggyroad's picture

P4 what Fun!

I love this place!

Save_America1st's picture

I do remember that from a

I do remember that from a long time ago, but had totally forgotten about it.  That's some geniusly creative stuff right there that can only be found in the great land of Turdville.

Made me laugh and reflect back to the previous couple times I was a "Firster".   Had a double-first on the same day between a post at the old Watch Tower site and a post on the new site when there were some technical difficulties one day and we were using the Watch Tower as a back up.  Ahhhh, Turdville memories...

So congratulations to "Metalsbyamile" for quickly becoming part of the "Firster" club.  It is tradition around here and I've never thought it was a bad thing, although some folks seem to treat it like nails on a chalkboard for some reason and can't quite get over it. LOL

Now the resurrection of Pining's Dr. Seuss rendition of "First" is a classic that is sure to inspire more hard-fought competition for the top spot on the posts! 

The write-up about "Rounders" was a great allegory also and I liked it very much. 

Another excellent web artist, WilliamBanzai7, has put up a great President's Day tribute to Lord O-bomba over at ZeroHedge this morning.  Great stuff:   http://www.zerohedge.com/contributed/2014-02-17/presidents-day-2014

Have a great day everyone...and hey...how's abouts them PM's??? cool  Keep stackin'!!!

 

Texas Sandman's picture

Public has walked away from the table before

For example after the great crash.  People were heard saying, "I'll never think of buying another stock ever again...".  But then they created the SEC, we had a roaring bull market, and folks promptly forgot & jumped back in with both feet.  And here we are...

I personally believe there will come a time to cash in precious metals and buy stocks again, and in terms of time, it's not that far off.  In terms of price, it's very far off.  Let me just say, I'm looking for the price of gold to exceed the price of the dow jones before that happens.  And the public will once again be swearing, "I'll never buy another stock again.".  The day to do this isn't today.  I think buying stocks or bonds today is financial suicide.  But the day WILL come.

Just remember you're dealing with a people who elected Barack Obama twice, and 25% of whom don't know the earth orbits the sun.  That's what the big financial players are counting on.

Turd Ferguson's picture

fwiw

MODERATOR

I was on with Dr. Janda again yesterday. If you're new to Turdville, you might find this interesting.

http://www.davejanda.com/guests/turd-ferguson/sunday-february-16-2014

ivars's picture

The bottom of this GSR

The bottom of this GSR channel has not been breached since May 2011 . Its quite strong support; PMs visited it today:

It will be very significant if they do break it downwards; and if they don't.

Libero's picture

When hasn't buy and hold worked?

For example, I had a friend who had for years put money away on a monthly basis into his 401k buying a stock mutual fund. I felt sorry that he really didn't know that his net worth suffered so much during the 2008 crash.  I was so smart I had invested in precious metal stocks.  It worked out for him and now I hope it works out for me via precious metals.

I wish I had invested a ton after the crash of 1987 but I was listening to some Elliot wave fool.  Truth be told, if someone had made monthly purchases since 1929 in the DOW, they would be doing just fine (aside from being dead by now).

In the long run, investing broadly in anything (except for tulip bulbs) is cyclical and what is down goes up and vice versa.  This is the poor man's revenge, dollar cost buy and hold  because market manipulators lose their edge over time.  We can breath better now that it "appears" precious metals are now going up. 

As stated above, in broad market terms, buy and hold over time works quite well.

Texas Sandman's picture

When hasn't buy and hold worked?

If you bought stocks right before the 1929 crash, how long would you have had to hold to come out whole (not ahead... WHOLE)?  I think the answer is roughly 20 years!

If you had held gold before the crash, and traded into stocks at the bottom (ignoring the gold confiscation, holding it abroad and liquidating there), how much better would you have done?  Nobody was ever prosecuted for failing to obey the confiscation, incidentally.  And gold did well during the depression.

How about trading out of stocks and into PMs in 2000 and trading back at some time in the future (20 year cycles seem to be the vogue).  I'm not saying I'm smart enough to have done that.  My signal to buy PMs was the TARP in 2008 and I've seen absolutely nothing since to change my mind.

I'm not talking daytrading here mind you.  Just viewing PMs and stocks as competing asset classes that move inverse to each other and using a broadbrush cyclical allocation.

.

StevenBHorse's picture

Great stuff

The poker analogy is great.  I was just thinking of Teddy KGB this morning.  

Little do people realize as well that there is a whole industry dedicated to skimming every order that their mutual fund places.  Taking fractions of a penny here and there 10,000 times a day.  The rake if you will.  It takes place on every hand.

When people finally get up and leave the table for good, is when I will go and sit down in their place.  In that environment, valuations will be at the lows, and you can Ronco that shit and set it and forget it.

images?q=tbn:ANd9GcRcOb6QYjfEbryKxjAmJ9g

I am one of the db's that detests the first postings, but I can't believe that people would take the time to email you about it.  I thought I was a loser.

Libero's picture

Sandman

The smart man or woman would have suffered a great percentage loss but would have continued buying through all those lean years and remember that this person would have been investing for years before the crash so... probably 1936 sitting pretty again??? 

Occasnltrvlr's picture

Buy and Hold

If one buys and "holds" the Dow, they aren't holding anything.  They swap out the losers and replace them with winners.

Perhaps you aren't actually paying attention.

TomMack's picture

Grace Jones Rounders...

i don't think she got in the credits   as her version of Ring of Fire played as background music.  Great movie!!!!GraceJones.jpg

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