Vegas Reconnaissance, Plus, Looking for a Few Good Mercenaries

October 31, 2012
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We received a nice note recently from Live Feed member Chip M. Here is the gist:

 Glad I found Mercenary Trader although I can’t remember how I did… You guys have made a lot of money for me and although I don’t track such things 100% you have never lost me MUCH money. Your approach to risk is the same as mine — you manage losses well and keep them small.

Yup, that’s our modus operandi. It is very hard to take a Mercenary’s money…

As general rule, we look for asymmetric risk/reward opportunities and keep a very tight rein on the downside, which in turn lets us take larger positions (in relative terms) and scale aggressively into winning trends.

These markets have been rough — no one has to be convinced of that. But we’re proud to say a number of Live Feed members have been with us from the very beginning or close to it — going on two years now — and of course we’re deeply appreciative of that loyalty (which comes in response to what we’ve delivered).

It’s our plan to keep making the Feed better, stronger, and more powerful. We have been consistently rolling out “upgrades” and added features every few months or so and have no intention of stopping.

If you would like to test drive the Live Feed for 14 days — and lock in the current rate (which can only rise) for two years — you can do so here.

We recently took a trip to Las Vegas to attend the Alternative Asset Summit… and to play our fair share of poker while there. The Vegas poker landscape has definitely changed…

The new Aria poker room — and the Aria hotel where we stayed — was deserving of its strong reputation. Practically the whole room is devoted to No Limit, with 1-3, 2-5, and 5-10 games spread across two dozen tables.

While there, we saw name brand poker pros like Tom “Durrr” Dwan and Phil “poker brat” Hellmuth on multiple occasions. (If you don’t know these players, their exploits are worth checking out on youtube. Dwan is known for bluffing hundreds of thousands of dollars in high stakes cash game pots. Hellmuth is an entertaining crybaby who just won his 13th WSOP bracelet.)

But can Aria lay claim to being the best poker room in Vegas? Nope. Although it was close on some measures, we give that distinction to the Wynn.

The Wynn poker room edged ahead on a couple measures:

~ While every room had reliable free wifi — important when you are doing research at the table — the Wynn’s was blazing fast.

~ In addition to $3 per hour comp rates for 2-5 and up, the Wynn has installed electric plug charging docks for every seat at the table. (Talk about catering to gadget junkies!)

~ More importantly, the buy-in cap on the Wynn 2-5 game is $1,500 whereas the Aria 2-5 cap is $1,000… and the Wynn 5-10 buy-in has no cap at all (whereas Aria 5-10 is capped at $3,000).  These larger buy-ins are far more advantageous for experienced players.

What about the Venetian and the Bellagio? Truth be told, they weren’t even in the running (for best poker room title)… the Venetian is no longer a destination for serious no limit cash game players. Word is that the Venetian has really “tightened up” on the no limit side, as a function of action players gravitating to Aria and the Wynn. (A nice example of self-reinforcing trend: The more the Venetian develops a reputation for being “nitty,” the more it becomes so.)

The Venetian also did something strange with the lights. They turned the brightness way, way up — almost to the feel of a bus terminal or a nightclub after closing time.

And as for the Bellagio: As broad-shouldered guys both above six feet tall,  we refuse to play there on general principle… they pack you in at the Bellagio like sardines.

The Venetian does still have excellent tournaments multiple times per year (with structures far more attractive than most World Series events)… but as for No Limit, the Wynn comes out on top.

Sticking with poker for another round or two, Stephen Y. writes:

I used to play a fair bit of 5/10 poker (for the usual buyin of $500-$1000). But occasionally if the game looked good, I would step up to 10/25 or 25/50 (Fallsview Casino on Canadian side of Niagara Falls) and buyin for the min which was around $1500.

The thing I noticed was that I could play this stack quite effectively and profitably, but that if I had a good run of cards and built this stack up (to say $8000) that my game would deteriorate.

I knew that my game was deteriorating, and I knew that fear and uncertainty were the source of the deterioration, the difficult challenge (as you have written about in other articles) is trying to understand and change yourself and overcome the fear.

Again, I love your website, just wish I had more time to devote to it (and poker)…

Ah yes, the issue of relative bet size, and a tendency to anchor on absolute dollar amounts. Many poker players and traders face it. Below a certain threshold, it’s all Fonzie (cool). But go much above that, and Fonzie leaves the diner…

We would argue it is much more than fear, though, that constrains a short-stacked player in a high variance game.

Having written at length about the connections between trading and poker, another connection, which winds up being a source of great irony, is as follows:

The average poker player, like the average trader, is dramatically undercapitalized.

This undercapitalization creates significant opportunity for other, more deeply capitalized players who can exploit it.

When 8 or 9 grossly undercapitalized players sit down at a table (a common occurrence), the mutual disadvantage is neutralized, as such that none of them really see it.

But when a deep stacked player comes along — equipped with the knowledge of how to use that stack — it is like a tomcat sitting down with mice…

It is astonishing, but also understandable, why so many players sit down with buy-in amounts way too small for the games they play. From a casual perspective, we would estimate the average 2-5 player sits down with $600 or so and the average 5-10 player with $1,000 to $1,500 (right in line with what Stephen suggested).

To engage in theoretically correct play, we estimate these amounts should be, literally, four to eight times bigger. (Even if a game is capped, one can play the capped stack like a much larger stack, with the money in one’s pocket effectively considered in play. It is the size of your average bet that matters. A $1,000 stack can be played like a $5,000 stack if one makes $200 and $500 bets and casually replenishes, and so on.)

There are multiple reasons for this capitalization gap. We could give a two-hour lecture (literally) on poker theory and capitalization, and why the average poker player is at a great disadvantage mentally and logistically due to not having enough chips (and willingness to play them).

To condense the argument, perhaps the key problem with undercapitalization is as follows:

  • Proper bet sizing is a function of pot size first and foremost.
  • The majority of players size their bets far too small.
  • They do this, as a general rule, because their stacks are too small.

The smaller your stack in relation to the average pot, the less ability you have to bet properly, and comfortably, as a matter of strategic habit.

Consider, for example, a moderately active 2-5 game where the average pot size (for a healthy pot) is $250.

If you want to win a pot with a river bluff against a medium-strong opponent– and believe he can be pushed off — what is a good sized bluff to get the job done?

Betting half the pot won’t do it, because a 50% pot bet gives your opponent 3 to 1 odds.

If you bet $125 into a $250 pot, he only has to call $125 to win $325. That is easy enough to do with top pair, as the breakeven rate on the call is just 25%.

A 100% pot bet is much more likely to push your opponent off the hand, especially if he has a weak kicker, fears two pair or a set, or has an extra fear aversion to larger dollar-amount bets (as many players do).

But a 100% pot bet for a $250 pot is, drum roll please, $250. If you are only playing $600, that is more than 40% of your stack! And this is for a move that should be casual… that you only need to work 55% of the time or so (as anywhere above +50% it is profitable)… given this, how in the world does anyone sit 2-5 for just $600?

Answer: They play badly, in terms of betting too small… or missing numerous positive expectation opportunities to bluff… or getting themselves “all in” committed prematurely… or all of the above, all of which reduces net profit over time.

At 5-10 the math gets even worse, because the typical 5-10 game is not twice as big as the typical 2-5 game… it is often four times as big.

When you bump to 5-10 the blinds double, but the aggression level more than doubles. In a 5-10 game, a healthy pot can run $1,000 or so. And sometimes the best move is not just to 75-100% bet a pot, but to overbet it – to bet 25 or 50% more than the pot. (Most players never do this — except with the nuts — but nor do most players win long-term, so what does that tell you?)

That means that, at 5-10, to play for optimal EV, or max profit, you have to have the ability to make $500, $1,000, and even $1,500 betssingle bets mind you, not shoves, just theoretically correct value bets and bluffs — as a matter of course if you are going to implement optimal play.

If you limit your ability to do this, you are playing too small (relative to profit potential)… but of course this is what most players do… they bet suboptimal amounts on a constant basis because they are always significantly short-stacked (relative to max EV play).

Nor does the above even touch on the implied power of having a deep stack behind you, or the volatility pressure one can place on opponents via routinely large bets… when a player with a $500 stack makes a $200 bet, the attitude of the deep-stacked player is “why not call, it’s only $300 more.” But when a player with a $5,000 stack makes a $200 bet, there is a possibility that thousands more could be coming.

And then of course there is variance… just this past weekend yours truly (Jack) had a $1,000 swing in a 2-5 game — down $1,000 in the first three hours, making it all back in the next three.

Nothing extraordinary or exceptional about this, just a normal outlier in an active game… but you must have the ability to withstand fluctuations like this without losing your cool, without losing your weapons, and without losing access to theoretically correct play (which means not being undercapitalized!).

It’s no surprise that Mercenary Trader caters to a somewhat exclusive audience… most traders, let alone most investors, don’t have time for all this theoretical stuff. We love it, though — and we plan to develop a lot more material on position sizing and trade management in future — because this is the stuff that makes a difference.

Academic theory, as we are fond of pointing out, is all too often pointless. But theory intertwined with practice, and tempered by real world result, can be very, very powerful.

This is why, at some point in the next 12-18 months, Mercenary headquarters may relocate to Las Vegas…

As you have likely guessed, poker has been very good to us. But poker’s potential remains barely tapped… this is in part thanks to the competitive nature of today’s card rooms. The majority of poker rooms today (and all the big ones in Vegas) have excellent free wifi, with speeds matching what is available at one’s home or office, and are open to iPads and mini-laptops at the tables.

This enables us, as Mercenaries, to double dip at the tables — doing research and staying on top of markets and publishing duties in between hands. (Guess where this piece is being written?)

We mentioned lack of capitalization as a poker epidemic. Lack of understanding in respect to theoretically correct play is also an epidemic. By our casual estimate, ninety percent of players — and that includes those who consider themselves “grinders” and “pros” — do not actually understand the theoretical underpinnings of the game.

The poker books out there don’t help. Most of them are garbage. The good ones provide hints and clues, but don’t crystallize the whole picture. And one of the biggest problems — capitalization — can’t be addressed by the poker books anyway. If you told the average player how big of a bankroll they actually needed to handle 2-5 or 5-10 right, they would choke.

There is a tremendous amount of “dead money” in Vegas, just waiting for the properly capitalized (and properly trained) player to scoop it up. This also includes many of the young internet players who think they are god’s gift to poker. But they fail to realize that getting lucky and winning a $25,000 or $50,000 bankroll in a single lightning strike poker tournament has nothing to do with actual deep skill cultivation. Most of the would be “ballers” who move to Las Vegas with dreams of cash game domination will lose their entire stake in less than two years.

And we as Mercenaries, being Mercenaries, will be there to exploit this opportunity…

For the past year or so we have been actively developing a No Limit cash game methodology. Similar to a trading methodology, this cash game methodology is comprehensive. It covers all aspects of the game, and is rooted in foundational, theoretical principles that have been discovered and verified through countless hours of play.

The scope of this opportunity is tied to the reality of how unbelievably bad the typical undercapitalized, unaware player is… and this includes the vast majority of players at high stakes as well as small stakes games. (Those players who have money tend not to have theory, and tend to play rife with mistakes, which makes them even juicier targets.)

Quite frankly, if we had heard secondhand about the scope of profit potential in cash game poker, we would not have believed it. The “too good to be true” result had to be empirically tested, and verified, again and again…

We call the methodology “Maker 5.0″ — 5.0 is the current version number – with Maker being short for “Maker Taker,” as certain aspects of the approach were inspired by the rebate nature of electronic trading networks.

The truly beautiful thing is, the Maker methodology has potential to dominate tournaments as well as cash games. After all, cash game players are known to be better than tournament players as a general rule… and if the cash game side is this bad, well…

Apart from anecdotal potential, we have reason to believe that Maker could cultivate a huge edge in tournaments (again in accordance with well developed theory). We have yet to really test drive Maker in tournament settings, largely because small buy-in events (below $1,000) are generally not worth our time.

But we will be putting Maker to the tournament test soon…

So here’s where things get really crazy (circling back to the reason we are sharing this)… 

Legendary trend follower Richard Dennis, along with his partner William Eckhardt, conducted a famous experiment in which he taught a group of market beginners his trading methodology. They called this group “the turtles” because Dennis had seen baby turtles growing in vats in Singapore, and believed he could grow trend following traders in the same way.

The turtle experiment, of course, was a huge success. The turtles went on to book gargantuan profits — a handful still running hundreds of millions to this day.

We think we can grow poker players like this — not pure poker players, but full-time market analysts who become part of “team Mercenary” and fan out across the Vegas 2-5 and 5-10 tables, while simultaneously fulfilling their salaried research commitments.

The idea is to stake each member of “team Mercenary” with enough of a cash bankroll to start at 2-5… teach them the Maker methodology inside and out… and have them start generating $50 an hour (give or take) at the 2-5 tables, before moving up to $100-$200 an hour at the 5-10 tables.

Rather than get paid a percentage of cash game profits, however, these profits will then be rolled into major tournament buy-ins ($1,500… $2,500… 5K, 10K etc.), at which point large scale cashes will be split (on a pre-agreed ratio) between the Team Mercenary member and Mercenary itself.

Thus creating the potential for an analyst to earn hundreds of thousands within a reasonably short space of time… deploying Mercenary capital and the Mercenary methodology to poker as well as markets.

What kind of individual would it take, though, to pull off the above? If anything, our requirements for talent, drive and discipline will be higher than the original turtle requirements.

Such an individual would have to maintain all their duties as a top notch market research analyst — while simultaneously absorbing the distraction of the tables, executing the Maker methodology correctly, and avoiding the sins of excess so readily available in Vegas (or at least keeping them in check).

Another reason we like this program is because the temperament required for poker excellence is very similar to the temperament required for trading… to be a winning poker player you must be sharp, you must be observant and focused, you must be rational and logical, and you must be emotionally steeled in the face of variance. What’s more, poker actually enhances these qualities, meaning, the more passion you put into playing optimally, the faster you cultivate such qualities, even if they did not previously exist in natural abundance.

So in this sense we are looking for a few good Mercenaries… it is our intent, over the next few years, to meaningfully expand the Mercenary analyst team… and to enroll those in “team Mercenary” who wish to participate.

Do you have what it takes to be a Mercenary analyst? Would you be okay with the idea of eventually working out of Las Vegas, reporting to work on the 25th floor of a luxury high rise, and doing a good portion of your work with the clink of chips around you, as you learn poker simultaneously with trading?

We don’t have any formal hiring dates or an official number of spots available. Our basic goal at this point is to start building a dialogue with exceptionally talented individuals… and see where it goes from there.

To get an idea of the type of analytical capability we are looking for, read the chapter on Cornwall Capital in Hedge Fund Market Wizards. After reading that chapter specifically, contact us via Jack@ or Mike@ and we’ll see what happens.

Does the above mean we are shifting our focus away from trading? Oh no, not in the least. The poker opportunity — scooping up tens of thousands per month in Vegas cash games, via “Team Mercenary”, and parlaying it into six-figure tournament scores, with multiple team members to smooth the equity curve — is only one aspect of our long-run vision.

In terms of profit opportunity and capital structures, there is something we think of as a “liquidity pyramid.”

The base of the pyramid represents the highest liquidity, highest turnover profit maximization strategies.

At each level up in the pyramid, opportunities grow less liquid, but larger in scope. And thus, ultimately, with all engines firing and team Mercenary built out to five or ten individuals, the potential annual profit generated by the liquidity pyramid looks like this:

  • Cash game opportunity and tournament parlays: single-digit millions.
  • Highly liquid trading strategies (as practiced in the Live Feed): 10 million plus.
  • Less liquid, longer term deep value and special situation opportunities: 100 million plus.
  • Large scale macro opportunities on the scale of the 2007 subprime crisis… who knows?

Yes, we’re just a wee bit ambitious. But why not? It’s all good as long as you’re having a blast doing it… and you only live once, so why think small?

And of course, you don’t have to become a Mercenary analyst to enjoy the ride with us… as our scope of opportunity expands, we look forward to ever more interaction with our fellow traders, investors, and Mercenary community members — sharing knowledge and ideas and research… sharing and cultivating new trading skills… and having an absolute blast while doing so, in beautiful locales all around the world.

Viva Las Vegas!

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13 Responses to Vegas Reconnaissance, Plus, Looking for a Few Good Mercenaries

  1. Mark on October 31, 2012 at 2:27 pm

    I have played poker as my sole source of income for 5 years now. Here are a couple of random thoughts to factor into your thinking. You are going to havea a 50,000 hand breakeven stretch during every 500,000 hand stretch no matter how good you are. In live poker you are dealt 30 hands an hour. So if you play 40 hours a week 50 weeks a year that’s only 60000 hands. It’s clear to me that most people who play for a living don’t get this.

    Staking people is basically always -EV for either the staker or the stakee in mid-stakes games. If you are good enough to win in a midstakes game you wouldn’t give up half of your profit (or whatever the deal is) to play in tougher game that is going to be higher variance than playing in the smaller game where you could make about the same amount with lower stress. Staking is theoretically a great deal for the staker, but it attracts people who are making -EV decisions and those as a group are not the types of people that you would want playing on your money.

    • Anthony on October 31, 2012 at 8:21 pm

      Mark,

      I’d love to know how you arrive at the magical number of 50,000 out of 500,000. Correct me if I’m wrong, but wouldn’t the player’s probability of remaining in a break even state depend largely on their win rate? ie. A 5BB/100 winner is more likely to exhibit results as you describe than a 20BB/100 winner. Just because you might experience 10% of your career in a break even state, does not necessarily mean that others will also.

      I also believe (Jack/Mike jump of this if I’m wrong) that the method they are producing is supposed to eliminate much of the chance of -EV play. Many losing players have turned their games around due to great coaching and discovering new ways to think about and analyse the game. If this is what Jack & Mike are offering then there is every chance that the venture can be successful. Furthermore, a major reason why players go broke is poor BR management, a factor which will effectively be removed by the team being in charge rather than the player himself.

      Anthony

      • Jack Sparrow on November 2, 2012 at 9:42 am

        Yes. To be blunt, there are a lot of stupid bullshit reasons why players play bad, even so-called “pros.” Anyone in the Maker program would have the bullshit aspects of their game removed completely – seared away with a blowtorch. Not only would be they taught exactly what to do, along with the correct theory as to WHY they are doing it, all results will be tracked in deep detail. The picture is comparable to a talented athlete in an ideal coaching situation — someone who not only trains them exactly right, and gives them the tools they need to succeed, but also imposes iron discipline on them externally. This is a very different picture than the average schmuck who sits down at the table with typical medium-to-poor discipline levels, and then applies half-baked folk science to his decisions because he has not thought things through. The net result is the equivalent of a professionally trained iron man triathlete — who was selected for aptitude in the first place — regularly competing against a bunch of “weekend warriors,” many of whom don’t even realize it’s a competition (because a lot of “businessmen” play for entertainment, even at 5-10 and 10-25)… this is in large part why the opportunity exists…

    • Jack Sparrow on November 2, 2012 at 9:38 am

      Hi Mark, thanks for the comments.

      A key aspect of the idea is that anyone staked by Mercenary uses the Mercenary methodology precisely, which comprehensively covers everything down to requirements for detailed tracking of all decisions made. What this means is that no one is going to be making “-EV decisions” haphazardly. Furthermore, given our awareness that 90% of poker players don’t actually understand the deeper levels of the game, we aren’t about to go out and recruit the equivalent of an average player and then let them apply their own sloppy thinking with our capital.

      Finally, your expectation for guaranteed breakeven over a 50,000 hand streak is an interesting assertion, but not one we would agree with. If you expect to routinely go an entire year or more at breakeven, perhaps you do not have enough of an edge over your opponents — and remember you are speaking as a sample size of one here. This opportunity exists because we do have such an edge — a significantly powerful one, over the vast majority of opponents — as tested and vetted in the field. It also works in part because of the dynamics of competition level in “mid-stakes games” — which actually require much deeper capitalization awareness than the average player comprehends — and how all the intertwining factors work together.

      • Mark on November 2, 2012 at 12:42 pm

        Jack,

        It sounds like you have thought things through. I wanted to emphasize the importance of having the right expectations for yourself and communicating that to anyone who joins you.

        I’ve played virtually no live poker. The consensus is that play is much softer for given stake than online. So you probably won’t have the same lengths of breakeven stretches but there will certainly be a lot of noise. One 50,000 hand breakeven stretch for every 500000 hands was more of an average. If you look at the graphs of the biggest winners for ring games or 6 max long breakeven stretches occur a couple of times every million hands.

        Most people are woefully undercapitalized, so that does favor your point. I think a minimum poker bankroll should be 100 buyins for the game you are playing so that would be $50000 for 2/5 or $100,000 for 5/10.

        Getting people to deal with the emotional aspects of the game and other “softer skills” is as important as actually being a competent player.

        • Jack Sparrow on November 4, 2012 at 9:56 am

          Absolutely — very strongly agree with your last sentence. Though we have no interest in mere competence. Our focus is on domination.

          This is another advantage we see built into the arrangement. The average player has a lot of trouble with the soft skills as you point out. What we will do is create an environment where theoretically correct play is emphasized within an iron discipline context. The typical pressures will be reversed: A player will be motivated to “do the right thing” 100% correctly at all times. Failure to do this will lead to an ass-kicking (verbally speaking). Repeated failure will lead to termination. And results will be analyzed based on process, not outcome.

          In addition to the above, knowledge and understanding will be emphasized. Not only will the team member be aggressively incentivized to behave optimally at all times, they will be taught the underpinnings of the theory (and tested on it to make sure they “get it”). When it comes to high pressure decision making situations, knowledge really IS power, because pressure is born of ambiguity and uncertainty. The better you understand exactly what needs to be done and why, the less decision-making pressure you feel. You just see what needs to be done and do it.

          And yes, capitalization is key. Not just to handle drawdowns, but in order to size bets properly and pursue +EV without fear or hesitation.

          With that said, there are different ways to look at a bankroll. Having a lump sum of capital is not necessary, for example, if one has the ability to replenish a bankroll routinely as need be, like a wellspring that fills up with water. Then there is the value in spreading variance over multiple practitioners. As Blair Hull pointed out in New Market Wizards, five members of a blackjack team can all play off the same $100,000 bankroll as if each player had 100K, because each player’s variance is truly independent, and if all players have a positive edge that edge will assert itself faster via accelerated number of trials. At any rate, from a functional perspective we will always be as deep as necessary, 100% of the time (another meaningful long-run edge).

          p.s. Re, online vs live… another big difference there. You speak to the problem with online poker — way too many pros trying to grind out a living. The brick and mortar world is filled with casual players, a good number of them with fat wallets, looking for a thrill. If it tells you something, there is a lot of traffic (for a certain type of player) between the poker table and the blackjack table — and believe me, these people are not smart enough to be counting cards. You will not find many online games seeded with rich business owners to whom blowing $5,000 over a weekend, with all the action, alcohol accompanying etc, is their idea of fun. This is the whole raison d’etre of Vegas — attracting fun loving gamblers ready to give up their cash. In that sense the alpha level cash game player has a symbiotic relationship with the casino, extracting consistent profit from tourists, maniacs and beta players alike (while helping the poker room through consistent action, rakes and tokes). And of course we are also doing market research and getting real work done at the tables. Basically, brick and mortar is the nuts…

  2. Darrin on November 4, 2012 at 1:12 pm

    Hi Jack,
    This is really a fascinating post, especially for a non poker player like me. Your emphasis on process and decision making seem to be the base of a solid business plan. My question is, can your strict adherence to process and discipline be extrapolated to other fields of speculation? Sports betting, ie..football, basketball etc? Or is there simply not enough edge in most other activities outside of trading and poker?

  3. lvjames on November 6, 2012 at 9:38 pm

    Where do you find Hedge Fund Market Wizards?

    • Jack Sparrow on November 7, 2012 at 8:29 am

      Umm… Amazon.com or Barnes & Noble?

  4. Gregg on November 23, 2012 at 11:41 am

    Jack,

    Which poker books have you found worthwhile?

    • Jack Sparrow on November 25, 2012 at 2:31 am

      All of Dan Harrington’s books are excellent (the multi-volume Harrington on Hold ‘Em series). Elements of Poker by Tommy Angelo is useful on the finer points. Zen and the Art of Poker by Larry Phillips has some nuggets. And The Poker Face of Wall Street by Aaron Brown is an excellent read.

  5. Gregg on November 30, 2012 at 4:28 pm

    Thanks Jack

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