The Short of It #1, Be a Card Player

Understanding the probabilities when adding or trading a position is critical to success. Beefing up your normal scenario forecasts is a great way to help card players (read: good PMs) win.

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“We’re all just card players,” he told me, as he carefully watched for slippage on the big, volatile tech stock he was cutting by a third in response to some good news. He was fading the news, as they say. It was analogous to adjusting one’s bet at the card table based on the likelihood that ‘the win’ from here would be less, and the downside risk of loss, increasing.

The best card players think about the probability of success a lot more than they think about bluffing. More than they think about body language. And more than they think about playing with their chips in a trademarked way. In fact, the analytics that are now so familiar to baseball, football, and basketball fans – catch radius, WHIP, 3-point percentages from various spots on the floor – have been in place in the poker world forever. We always had those captions with percentages at the bottom of the screen, telling us how likely each player was to win as we watched the pros. Sometimes the bluff won. Sometimes the low percentage player pulled an unlikely card. But most of the time, the bets correlate to percentage likely to win. And while game theory instincts help, truly understanding the odds is preferable.

And so it is in a choppy market like the one we’re currently in. We face uncertainties around rates, fiscal policy, global trade and, critically, the cost of goods sold. In fact, one could look at the last few weeks of market action and surmise that the probabilities of winning on the long side have decreased, while shorting incentives have grown. Yes, we are all just card players. So, let’s talk about playing for better odds on the short side.