Market Wizard Jeff Yass Beats the Odds with Poker Investing

This is a guest post by Texas Holdem Investing.

wsop-chipJeff Yass (and his trading firm Susquehanna) is a prominent example of Texas Holdem Investing in action. Although Yass has been intensely secret about himself and his firm in recent years he first appeared in the popular investment media through an interview with Jack Schwager for The New Market Wizards: Conversations with America’s Top Traders.

However, just this week the Philadelphia Magazine has written a detailed background piece on Yass and Susquehanna (“Beating the Odds“) which demonstrates the extent of the close links between poker and trading / investing. Susquehanna already featured on this site where it was described how the firm had held a poker tournament earlier this year in Dublin to select trainee traders for its European operations.

The Philadelphia Magazine piece goes to greater lengths in explaining some of the inner workings of Susquehanna and the integral role that poker plays in the training and work ethic of the firm’s traders.

One of the key parts of the article describes the timeline of Yass’ road to generating immense wealth through Susquehanna. Yass started learning his ideas about how the world of investment works through playing poker. He then spent some time gaming in Las Vegas before getting a seat on the Philadelphia stock exchange where he began to build his options trading empire. Clearly, this is an explicit real-life example of the Texas Holdem Investing education process in action.

The article proposes that the foundation of Yass’ brilliance is his ability to make rational decisions repeatedly in fields that are typically swamped with emotions – such Texas Holdem poker and investing. And part of this ability to make rational decisions is based on the capacity to analyse the probabilities of a situation properly and not simply based on the mental short cuts that people often apply and which are generally wrong. The example in this article, which in turn is from the New Market Wizards interview, is the explanation of how to guess correctly in the “Make A Deal” game show that was hosted by Monty Hall.

Yass’ operating style at Susquehanna in the investment world also bears a strong resemblance to one of the other great (Texas Holdem) investors who has been mentioned on this site – Warren Buffett (and Berkshire Hathaway). Like Buffett, Yass operates with a low profile and located Susquehanna in a nondescript building in the suburbs of Philadelphia, far away from Wall Street. Quite similar to the Berkshire Hathaway headquarters in Omaha.

Yass started off playing poker in college where he and his colleagues found poker as a way of honing the skill of using probability and game theory for risk taking. Poker also taught the group that the critical element of risk taking was to find an edge which would last over the long term and then apply it relentlessly.

Yass did believe the markets were more than just about enabling financial success but that they also provided social utility. Markets in securities enabled ideas and risk to be converted into financial amounts which could then be traded, thus making it easier to turn ideas into useful items and services for society. Yass’ thesis focused on the benefits of stock options in this context. This is an interesting and compelling concept and an antidote to the generally accepted wisdom that the market is a “casino”.

Yass then went to Vegas to “hit the tables”, where he described that he took many knocks but at the same time learnt a great deal. Texas Holdem Investing also provides a learning investor with the ability to take some hard knocks and learn from them in the poker world before risking serious capital in investments.

After leaving Vegas Yass moved to Philadelphia and took a seat on the exchange just as the world of options was taking off into the stratosphere. Yass found the “game” of options to be identical to poker. The options trader had to read the cards over the course of the game time (analyse the way in which a stock might move over a specific time frame) and read the other players in the game (the buyers and sellers of the option being traded). The options trader had to do this fast in a moving market, a skill which Yass had developed through his years of playing poker

One of the fundamental principles at Susquehanna is that when the odds appear to be in favour of the trader then the capital risked should be significant. This is tied into the theory of positive expectancy from poker – if a player makes the right decision in a particular situation then over time the player will come out ahead, regardless of the individual results. Another core principle of the firm is to bet many times and quickly, and to cut out of losing trades quickly. This is another play straight out of the poker world – play as many games as fast as you can, cut out of the bad ones quickly, and then bet big on the good ones.

Susquehanna hosts in-house poker tournaments with cash-prizes as a way of recruiting new traders and finding out if their decision-making abilities fit the firm’s requirements. The Philadelphia magazine journalist puts this into words that closely epitomise the Texas Holdem Investing method – “reckless poker player equals reckless trader”. Of course one can start off as a reckless poker trader and then improve, which is also possible for an investor.

The article also describes how Susquehanna utilises in-house games of poker “front and centre” as a teaching tool. This is because of the Susquehanna founders’ strong beliefs about similarities between poker and investing (this principle is the central tenet of Texas Holdem Investing). Poker tutorials in Susquehanna are designed to remove (the author uses the more dramatic term “bleed out” – one wonders if that is a quote from a Susquehanna employee) the harmful emotions that can colour rational decision-making. And this use of poker for education is based on an edict from the top by Yass to institute the game as a core part of training. Perhaps Wall Street banks (and universities) could take notice of this initiative.

In classic reverse Texas Holdem Investing style one of Susquehanna’s founders – Eric Brooks – left the company to play professional poker and won the World Series of Poker in 2008. Interestingly, he donated his winnings to the Decision Education Foundation which teaches children the science of decision making.

The article closes with some of the author’s thoughts on where Susquehanna is now and how Yass has maintained strict secrecy for some time. However, the Masked Financier is not too interested in all that. Validation for Texas Holdem Investing from one of the major options trading firms in the world is sufficient.

For more on poker and investing/trading, please visit Texas Holdem Investing.

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