Hedging Your Bets With Matt Davio: Where Have All the Gamblers Gone?

With more hedge funds than stocks and no real amateurs left in the markets since 2002, we are living in a strange world. Volatility is gone and the hedgies are left around a flat market just firing away at each other. No one is being taking out on a stretcher or left for the buzzards. Survivorship is similar to that of equities from the 2000 bubble years. What happened to natural cycle of failure and rebuilding? 

In my opinion, the Fed is bent on not allowing a natural recessionary period. In the long run, the Fed's easy credit program only prolongs the agonized life of today's poorly run businesses, until their last drip of life-blood is gone. Failure is not necessarily a bad thing…in my eyes it is an absolute to the true capitalistic process. The truly strong will survive or resurrect with a better business model. Think Darwin. 

In light of the liquidity today, there are many historical comparisons that show us how NOT to have government interfere with the natural selection process, i.e. Brazil in 1980, Germany in 1986, Japan in 1978. But since the big boys chose Bernake to succeed Greenspan and not myself, I'm going to have to go along with current policy. 

With that said, I was thinking of my poker playing years in high school and college. My first lesson was to figure out who the good players were and which players were weak. Trying to take money from the "players" was too much work and not enough reward. 

I concentrated on the guys at the table who should not have been there. These were the "gamblers." They played cards and watched the sports spreads at the same time, saying, "Michigan State is up three at the half," or "The over/under is 52 in the Monday Nite Game". That let me know that these guys were "gamblers", playing several games of chance at the same time.

One of my goals was not to take too much money away from the gamblers. I wanted to take just enough money to keep them coming back. If you took too much, you scared them away for awhile, maybe forever. If they left, you ended up stuck with the "players". And remember, I don't care how good a player you are, it's much more difficult to take money away from other "players" than it is from "gamblers".

It was also important to make the gamblers feel good about losing. While it was important that they occasionally win a nice hand, it was even more important to occasionally let them off the hook if I knew things were not going to go their way. For instance, if had a winning hand, I would tell my friend, "Dave, I've got the nut hand" (translation, "I've got the winning hand"). Dave knew that when I said that, I meant it. (You never wanted to be caught being a liar. It's OK to bluff, but not to lie). Dave would appreciate it, as it saved him from throwing away good money on a losing hand. What he didn't realize was that I was only trying to keep him coming back so I could maximize my winnings.

These ramblings like me to my theory as to why it is so hard to make money in the markets right now. The markets have scared away all the "gamblers." Everyone, especially the gamblers, made so much money in the '90s…but then the market corrected too much and scared away the gamblers. They didn't mind playing when they were winning big, but being emotional illogical beings, they ran away like scared, confused rabbits when they lost big.

We need the gamblers. They are the ones that make it so easy for the rest of us to make money. We simply watch where the gamblers are going and capitalize on their lemming-like moves. Very little logic or thought goes into their decision-making process, and if there is any, it's usually very superficial. But the market has scared away the gamblers.

The market has also committed another terrible sin. It has lied. It lied about the hand it was holding. How did it lie? It cooked the books. The balance sheets of Enron, WorldCom, Global Crossing and Adelphia were a pack of lies. And to top it off, the lies were confirmed by the likes of Arthur Andersen. Furthermore, the Street pumped IPO and tech research like carnival barkers, welcoming the public to open accounts on the promise of a bright new future. Thanks a lot, Henry Blodgett. Like my friend Dave, "gamblers" don't like it when you lie to them.

The people that make it easy to make money have left the market in droves. And so we're left at a table of "players". It's simply harder to make money from players, no matter how good you are. We all need the average investor back. And when the lemmings, the schools of fish, and those that live on emotion come back to the markets, our jobs will all be a lot easier.

Where have those gamblers gone? I think they have gone to Real Estate and online Poker. Sure there are other places that people's monies have gone. But they will be coming back to the market again when they find out that Real Estate and online Poker have lied to them too. In the meantime, I'm up against the players and it's a lot of work for a little reward – particularly in a flat market.