Rounders

72
Mon, Feb 17, 2014 - 8:28am

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.

.

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.

About the Author

  72 Comments

ag1969
Feb 17, 2014 - 8:41am

Second

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

The Judges Game

[Great Movie Scenes] Rounders - Judge's Game
silver66
Feb 17, 2014 - 8:50am

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

Feb 17, 2014 - 8:55am

metalsbyamile- The First Club

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

Behold:

Feb 17, 2014 - 8:56am

Excellent post, Pining

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

We're all very fortunate to have you here!

Feb 17, 2014 - 8:59am

Pining!!

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.

metalsbyamile
Feb 17, 2014 - 8:59am

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.

Hammer
Feb 17, 2014 - 9:05am

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.

metalsbyamile
Feb 17, 2014 - 9:06am

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

opticsguy
Feb 17, 2014 - 9:08am

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...

Gold Dog
Feb 17, 2014 - 9:17am

Third?

I am honored.

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

Your friend,

Dog

Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Subscribe or login to read all comments.

Contribute

Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
10/9 10:00 ET Wholesale Inventories
10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/1 10:00 ET Construction Spending
10/2 China Golden Week Begins
10/2 8:15 ET ADP jobs report
10/3 9:45 ET Markit Service PMI
10/3 10:00 ET ISM Service PMI
10/3 10:00 ET Factory Orders
10/4 8:30 ET BLSBS
10/4 8:30 ET US Trade Deficit

Key Economic Events Week of 9/23

9/23 9:45 ET Markit flash PMIs
9/24 10:00 ET Consumer Confidence
9/26 8:30 ET Q2 GDP third guess
9/27 8:30 ET Durable Goods
9/27 8:30 ET Pers Inc and Cons Spend
9/27 8:30 ET Core Inflation

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Key Economic Events Week of 9/3

9/3 9:45 ET Markit Manu PMI
9/3 10:00 ET ISM Manu PMI
9/3 10:00 ET Construction Spending
9/4 8:30 ET Foreign Trade Deficit
9/5 9:45 ET Markit Svc PMI
9/5 10:00 ET ISM Svc PMI
9/5 10:00 ET Factory Orders
9/6 8:30 ET BLSBS

Key Economic Events Week of 8/26

8/26 8:30 ET Durable Goods
8/27 9:00 ET Case-Shiller Home Price Idx
8/27 10:00 ET Consumer Confidence
8/29 8:30 ET Q2 GDP 2nd guess
8/29 8:30 ET Advance Trade in Goods
8/30 8:30 ET Pers. Inc. and Cons. Spend.
8/30 8:30 ET Core Inflation
8/30 9:45 ET Chicago PMI

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

Key Economic Events Week of 8/12

8/13 8:30 ET Consumer Price Index
8/14 8:30 ET Retail Sales
8/14 8:30 ET Productivity & Labor Costs
8/14 8:30 ET Philly Fed
8/14 9:15 ET Ind Prod and Cap Ute
8/14 10:00 ET Business Inventories
8/15 8:30 ET Housing Starts & Bldg Permits

Forum Discussion

by Solsson, 13 hours 28 min ago
by Pete, 17 hours 21 min ago
by SteveW, 18 hours 4 min ago