words Al Woods
You’ve probably heard it said that investment management is like gambling in a casino. Is there truth to this maxim? We spoke to Kane Kalas, a full-time investment manager and ex professional poker player, who is still regarded as one of the world’s elite players, for answers.
Choice And Risk – A Key Feature Of Both
Kalas is keen to point out that the similarities between gambling and investment management. Both involve choice and risk, and, in particular, the risk of exposing capital to potential loss in the hope of turning a profit. But there are also major differences that set the two apart. From the time commitments required to engage in each activity, to the overall expectations of the outcomes, it’s important to note the distinctions between the worlds of investing and gambling.
The Similarities
- Gambling and investing both involve an individual or group risking their own capital with the hope of reaping a profit.
- Both investment and gambling have the same key principle – minimizing risk while also maximizing reward.
- Bankroll management, or limiting the amount of capital risked on any one trade or any one bet, is a concept that one must master in order to succeed at investing or gambling in the long run.
- Both professional investment managers and professional gamblers must have tremendous poise under pressure and must avoid making decisions based on emotion.
The Differences
- In aggregate, investors have the odds in their favour. The same cannot be said for gamblers, all except for the sharpest of whom lose to the house in the long run.
- Gamblers generally compete against one or many known and observable entities – the house, for example. The house sets the rules and the rules do not often change. Even in the case of poker, sports betting, or race track wagering, in which gamblers compete against more than one person simultaneously, the number of competitors as well as the rules are more-or-less defined and observable. Investors, on the other hand compete against “the market”. The market is a collection of individuals and entities, including individual investors, money managers and brokers, technical traders, high frequency trading bots, and others. The game that the other market participants are playing is not observable to the investor, nor is the quantity of capital accounted for by each of these market participants.
- Winning in gambling has more to do with theory whereas winning in investing has more to do with data. For all of the people analysing past outcomes at baccarat tables in Las Vegas and around the world, none of them are able to gain a long-term edge with this strategy. The idea that an independent event, such as the Banker winning in baccarat, is more or less likely to occur due to what has recently happened is ironically referred to as the “gambler’s fallacy”. Card counters, however, who make their decisions based on mathematical theory that dictate whether a blackjack shoe is “heavy” or “light” are able to turn profits in the long run. Investors, on the other hand, tend to do worse when they stick to rules and better when they alter their strategies based on carefully monitored data. This scientific approach to investing has yielded the Renaissance fund, for example, a “quant” fund, tremendous returns. The Renaissance fund is perhaps the most exclusive and sought-after hedge fund on Wall Street despite the fact that Renaissance’s hires no traders with a background in finance (Renaissance only hires traders with backgrounds in the hard sciences).
Investment – The Basics
Investment involves committing capital or allocating funds to stocks, bonds, annuities, real estate, bonds, or other financial assets, in the expectations of making a profit or generating income. Expecting returns is the primary premise of investment. Return and risk are inextricably linked in investing, with high risk generally being accompanied by potentially higher returns.
Most investors advocate diversifying capital across several different asset classes to minimize risk. Investors analyse corporate earnings reports, price charts, risk and reward ratios, and often model a range of projected outcomes to get an idea of the profitability of an investment. Unlike gambling, investing usually involves the acquisition of a particular asset.
Gambling – The Basics
The very term “gambling” can be defined as a stake on a contingency. Sometimes called wagering or betting, it essentially means that you’re risking your money on something that involves chance and has an uncertain outcome.
Similar to professional investors, professional gamblers who succeed in the long run are excel at risk management. Professional gamblers get their edge in a variety of ways ranging from mathematical advantages such as counting cards in blackjack to information advantages such as wagering on a sports event with insider knowledge of an important injury. Due to the complexity of poker, professional poker players can gain an edge through various means including mathematical advantages, information advantages, and advantages in reading human emotion (and concealing one’s own emotion).
When playing slots or table games in a casino, bettors play against “the house”, while in lotteries, poker, sports gambling, and race tracks bettors wager against one another indirectly. In general, gamblers have the odds stacked against them; a vast majority of the total number of people who participate in any of the aforementioned types of gambling will be losers in the long run.
Gamblers, especially those who wager large amounts of capital, are often offered “comps” by a casino including free hotel rooms, dining vouchers, and free table play. Some professional gamblers are able to make a living off a comps; they hope to break even in their gambling activities and “profit” the value that they receive in casino comps.
Kane Kalas’s Viewpoint
Kane Kalas has been figuring out ways to beat markets since he was a boy. Kalas got his start in the poker market; at age 16, he invested his birthday money into home poker games among friends. By 18, he was one of the biggest earners in the world of online poker and was a regular in the “Rail Heaven” cash game, the highest stakes poker game to ever run on the internet. As of 2021, Kalas is the winner of the largest televised hand ever played and is considered one of the world’s elite poker players.
Kalas transitioned to becoming a full-time investment manager and part-time poker player in 2014. He is the founder and managing principal of Crystal Oak Partners and Crystal Oak Digital Assets.
When asked about the similarities between investment management and gambling, Kalas said,
“Both investment management and high stakes poker require composition under pressure, avoidance of overexposure and perseverance through volatility”.
Kalas’ core philosophy – “trust data” – highlights the approach he has taken to both of his passions. When commencing his poker career, Kalas feverously data-mined hands from the top online professionals in the world. He scoured the data for commonalities in betting frequencies and modelled his own strategy off of what was working for these professionals. Likewise, as a hedge fund manager, Kalas gathers and analyses substantial market data to look for patterns and correlations. He uses a quantitative investment methodology, modelling historical relationships between a variety of variables and the price action of a stock or group of stocks to make future predictions about whether these stocks will go up or down in price.
