(Interviewed by Louis James, Editor, International Speculator)
L: Doug, you often make a point of differentiating speculation from gambling, as in our recent conversation on winning speculations. But I know you also you like to gamble. Poker, specifically. Is that a vice, or a virtue?
Doug: Well, I've always enjoyed poker, ever since I was a kid, actually. Part of the poker experience is sitting around with some friends in an informal environment. But unlike, say, bridge, it lends itself more to smoking, drinking, and pleasant conversations on unrefined topics. Bridge draws a much more straight-laced, even uptight, crowd; alcohol, tobacco, and colorful language are discouraged around a bridge table – which is limited to four people in any event. Bridge didn't grow up in gambling halls and cathouses where the denizens were often armed. Wild Bill Hickcock wouldn't have fit in well at your typical bridge tournament, although, it must be said, that may have extended his life. Poker is, after all, more of a gambler's game than bridge. The luck of the draw is important in both games, of course, and there's a mathematical element in both, albeit a stronger one in bridge. A good memory is also much more important in bridge.
But much more than bridge, poker is a game of psychology – it's one of the most important aspects of the game. It's why there are world-class poker players who almost always win, over the long run, and other players who almost always lose – even though over the long run everybody gets the same cards. With pure gambling games, like roulette and baccarat, everybody loses in the long run.
L: Hm. I never really thought of it that way, but of course, everyone does get the same distribution of probabilities over time… So, what does "psychology" mean in this context? Do you play by looking at people's faces and guessing whether they are bluffing?
Doug: "Reading" the other players sounds romantic.... and there are people who are good at it. The idea is to look for "tells" – quirks in your opponent's personalities, such as squinting when they have high cards, or breaking out in a sweat when they have nothing. But I find it overrated. It's not that people don't have these quirks, but that it's harder than people think to read them in the brief time you have to do it, with people you don't know at all.
The first book on poker I ever read, when I was a kid, was a book by a guy named Herbert W. Yardley, called The Education of a Poker Player. Yardley had actually been a spook, employed by the U.S. government in the 1930s, sent on errands of mischief all around the world – and playing poker all around the world. The most interesting part of the book is in the beginning, when he tells anecdotes about the guy who taught him how to play poker.
Incidentally, the guy's name was Monte, and there's an old adage that you should never play poker with a guy named Monte, nor a guy named Doc. It's always a mistake. [Chuckles] Monte spoke of a game played with some farmer called The Swede with an obvious tell, after which he ended up with the deed to the farm. Horrible, sad story, actually. I don't believe I can read other people's tells reliably. It's an art. It's easier to make sure you don't have a tell others can read.
The standard text on the game today, incidentally, is probably David Sklansky's Sklansky on Poker. Some of his other books are worthy as well. You won't go wrong starting there.
L: So how do you play?
Doug: Well, it's not about what you have in your hand, but what people think you have. Bluffing is very important in poker. But more than occasional bluffing is not a good, long-term strategy. Neither in poker, nor in life. Eventually, somebody is going to call your bluff with the real goods. Or make you think they've got the goods to call your bluff – it's a question of double-reverse psychology sometimes. As an occasional strategy, of course, bluffing can work, because, as I say, it's not about what you have, but what other people think you have.
It's like that old joke about two campers sitting by the campfire. A bear comes out of the woods and charges towards them, and one camper starts putting his shoes on. The other camper screams, "You can't outrun a bear!" And the first camper yells back, "I don't need to outrun the bear, I just need to outrun you!"
Doug: [Laughs] Poker's a bit like that. There are many, many forms of poker, of course, but historically, it started out with two main forms. There's five card draw, in which you're dealt five cards, you bet, and you can discard anywhere from none, up to all five cards, and then bet again. And then there's five card stud, in which you're dealt one card face up, one card face down, and then new cards are dealt to each player individually and you bet on each. Then it evolved into seven card stud, and many other variations.
Championship poker, as played today, is Texas Hold ‘em, which is basically seven card stud. You're dealt two cards, face down, and five cards are dealt in the middle, face up, for everyone to include in their hands.
This is played all around the world. Casinos are going up everywhere, encouraged by many governments because they find they can tax casinos more than other businesses. That makes the game even more interesting to me, because you can sit down at a table anywhere in the world with whoever is playing cards, and match your wits against theirs.
L: Okay, I can see that. But back up to the actual playing of the game. If it's not about what anyone has in their hands, but about what people think others have in their hands, does that make it important to learn to communicate false signals? Do people develop false tells so they can set others up and then swoop in for the kill?
Doug: I wish I were good enough to do that! But if you watch really good poker players – and you can see them on television all the time – they typically keep a good "poker face." Many wear dark glasses to disguise what their eyes are doing – which isn't very sociable. The game has actually become a very popular spectator sport around the world. Although it's not a sport. Then again, they call golf and bowling sports, too. Personally, I don't consider something a sport unless you at least have to break a sweat when you're playing…
L: They have those special tables with cameras built in to the edges, so people watching on TV can see when the players lift up their two face-down cards to see what they have.
Doug: Yes. Anyway, if you watch, you'll notice that the best players – most of them – keep a poker face. They try not to reveal anything, true or false. But there's nothing to stop someone very, very clever from trying to give out false signals and use other forms of reverse psychology.
You know, one of the things the computer revolution has done is make online poker possible – and you can't even see your opponents' faces. The biggest online site is called PokerStars.net. At any given time you log on to that site, there are between 150,000 and 250,000 people from all over the world, playing poker. The stakes you put up to play are anything from one cent to thousands of dollars. They even have numerous free tournaments with cash prizes, So, theoretically, a player could leverage himself from zero to the world championship, which usually pays over $5 million for first place. Tournaments are run all the time with $50,000 and $100,000 prize pools. The really big ones have million-dollar or more pools. So we're talking serious money – and there's no possibility of playing tells.
L: So… Is it even any fun then? No cloud of cigar smoke, no politically incorrect conversation, and no trying to read the other guys' minds? Are you even matching wits at that point, or is it all about weighing probabilities?
Doug: Oh, you're definitely matching wits. What does it mean, for example, if the other guy starts out with a big bet? Is he bluffing, or has he really got the goods? You can't know, at the start. So the correct response is based on the quality of the cards in your own hand. If you have an unsuited 2-7 you should drop. If you have a pair of aces you should probably raise with your whole stack. But it also depends on how many people are betting after you, how much is in the pot at that moment, how close you are to being "in the money" if it's a tournament, and how much money you have versus the other players, among other things.
And there are advantages to playing online poker versus playing in person. For one thing, it's faster. In any given hour, there are more hands dealt – you get timed out if you wait too long to play your cards. And you can play several games at once. There are some very competent players who play many games at the same time. There's a guy named Arvad Khan – I don't know how he does it – who plays up to 20 online games simultaneously.
L: I guess that if you knew you had a tell of your own, you'd prefer to play online poker.
Doug: For sure. As you watch these guys play online, you see only an avatar for them. But you can watch their style of play, and still try to figure out what's going on in their minds, who's bold, who's conservative. You always look for any indications you might find for what the others are thinking, and the main one is to watch their bets. You see what he bets and you ask yourself, what could he possibly have? And then after the flop, what could he have now?
Doug: When they turn the next three of the five cards in the middle over, all at once. You see that, and what you think he might have, and try to figure what his hand is – "put them on a hand," we say – and the odds that it's better than yours. There's an excellent poker movie with Matt Damon, Rounders , that offers a great look at the world of no-limit Hold ‘em. There's a great scene in it where Damon's character watches a bunch of amateurs playing a friendly game, and tells them all accurately what cards they're holding, based on the way they're betting. It's not unrealistic that a good pro could do that. And any player should get in the habit of trying to put every other bettor on a hand. I'll also recommend The Cincinnati Kid with Steve McQueen, as the other classic poker movie. They're both worth watching, whether you play poker or not.
In any event, I find all the elements of poker quite entertaining. But, unless you're a natural, it probably takes as much time as any other activity to become truly expert at it. Which is to say, about 10,000 hours of actually doing it and studying it. This is a point made (although not about poker) in the book Outliers: The Story of Success, which I also recommend. That amounts to the equivalent of several years of full-time work. Probably more than a game is worth.
L: So, is it just a pastime, then?
Doug: I find that everything you do in life can be improved by anything that gives you an insight into how people think and helps you get better at estimating odds. This is true of studying, sustaining healthy relationships, investing – speculating, of course – just about everything. The Law of Large Numbers is at work everywhere.
And watching your own psychology is equally, or actually more, important. Poker is an excellent school for doing that, if you're introspective enough to assess where you make your mistakes. The nice thing about poker is that the stakes are generally much lower than in investing.
L: Or even in relationships.
Doug: Sure. Like anything, too much of it can become a bad habit, but I think poker teaches useful skills anyone would benefit from improving. Watching how your friends and associates play the game can give you great insight to how they're likely to act away from the table. Does the guy lose hope after a couple of bad bets? Does he go "on tilt" in a desperate but foolish effort to get out even? Is he too timid, or too bold, or heedless of the odds? It's actually much more valuable playing with associates than strangers for exactly these reasons. The game can cut away the social veneer of normal life, and give you an insight into who you're actually dealing with – good or bad. It's first and foremost a game of psychology. I don't know of anything as good. And, as my old man once told me when I asked him a long, complicated, somewhat cosmic, question: "It's all a matter of psychology". And that was his complete answer. Which is probably why I remembered it.
L: Hmmm… I hadn't really thought of poker in this context before, but when I'm out in the field with geologists or promoters who are eager to make their company's projects look like the best in the world to me, I'm always trying to distinguish between what they want me to think they have, and what they really have. There are even cards on the table I can see, like drill cores with or without good mineralization, and cards I can't see, like their private negotiations with the locals. I have to figure out what hand they could possibly have, what hand they are likely to have, and what the odds are that if we bet with or against them, our subscribers will come out ahead.
Doug: [Laughs] Yes. And I've got to say that of the people in our shop, Marin Katusa, our senior energy analyst, is a first-class poker player. His mathematical background is often in evidence when we're playing. Marin will bluff very occasionally (I think), just because that's an intelligent thing to do – and because he's known for not bluffing often. So he almost always pulls it off, I suspect. But he's not just very skillful at computing odds and looking at other players and putting them on a hand and comparing that to his own: he's also very street smart, which is very important in investing as well as in poker.
L: So, how many games have you played against Marin?
Doug: When we were all there in Croatia, we played almost all night, every night.
L: Who won?
Doug: Well, I actually don't remember who won the series of games in Croatia. You played only once, and then went back to work. But earlier this year Marin and I played against our colleagues at the Stansberry Group, including Porter Stansberry. I like all those guys, we all like to play, and do so whenever we get together, which is usually a couple times per year.
L: Fine, but no weaseling out: who won?
Doug: That last time we played against the Stansberry group, I guess there were about 25 of us seated. At the end it was Marin in first place, and yours truly in second. So our little shop triumphed, against the odds.
L: Okay – I know we're going to hear from Porter about this. I predict a challenge will be forthcoming.
Doug: Quite possibly. Porter is a good player, and anybody, including two-time world champion Johnny Chan, can lose in a given evening. But there aren't any mooches in that crew, which actually makes it more fun. [Laughs]
L: So, you're making a case that poker is a virtue, not a vice (see the current Casey Report for a discussion of the seven vices). Has there ever been a time when you were making an investment, or speculative decision, and consciously drew on the lessons you've learned playing poker in making your choice?
Doug: Yes, but it's probably more help subconsciously, and subtly. The broader your experience, the more you have to draw upon in any situation. And there is an element of gambling in playing the markets. You calculate the odds and do what you can to improve them, but there's still always the luck of the draw.
It's a lot like what Damon Runyon said: "The race is not always to the swift, nor the battle to the strong, but that's the way to bet."
L: Very good. I've already placed bets alongside you, but perhaps, given what you've said about him, I'll reallocate a bit more of my portfolio to bet with Marin's picks in Casey's Energy Report.
Doug: You should. Marin's made a lot of money for me, as well as himself, in the market. We plan to enter the World Series of Poker in 2010. It costs about $10,000, which is a fair chunk of change on one hand, but a rounding error on the daily fluctuation in a medium-size resource stock portfolio these days. Neither of us expects to make the final table, but I expect we'll both last the first day.
L: Okay then, ‘til next time.
Doug: Next time.
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