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.
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.
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 bets — single 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!