♟️ The Metagame #041: Risky Business

If you know me, you know that I’m a huge video game nerd. And last week, Hollow Knight: Silksong finally came out. This is the sequel to the original Hollow Knight that came out in 2017, and has been one of, if not the, most highly anticipated games of the decade (to the point where it became a joke in the gaming community that Silksong would never actually come out).

But it finally did. And it’s beautiful.

So that’s my only life update. I’ve put in a 40-hour work week on what might end up being the game of the year.

But I still managed to do a bit of writing.

Strap in.

Read time: 4 minutes

The word “risk” has an inherently negative connotation.

When you think of risk, you think of things going wrong, the cons outweighing the pros, the downsides of your actions.

But risk can actually be a good thing…

As long as you understand what it actually is.

I’ll continue to use poker analogies, because that’s what I know best (and it’s where many of these concepts come from in the first place).

When playing in a poker tournament, every action you take has some level of risk. Some actions are riskier than others.

Going all in, for example, even if you have pocket aces—the best possible opening hand—has a potential risk of ruin.

There’s the chance that you lose and get knocked out of the tournament.

Game over, c’est la vie.

Risk of ruin refers to the likelihood of losing your entire investment. Whether it’s in the actual stock market or a poker tournament, it’s the idea that one move has the potential to wipe out your entire bankroll.

If you sold all your retirement accounts and put all the money into Nvidia, you would technically be at risk of ruin.

(Though if you did this at any point in the past few years, you’d be a rich, rich person.)

If Nvidia somehow completely tanks their next earnings and their stock plummets 95%, your net worth would be decimated.

Similarly, in a poker tournament, making a move that includes all of your chips puts you at risk of ruin—even if the move is the best play.

This is why bankroll management is a fundamental concept in poker, investing, or any other money-related activity.

Just last week, in the World Series of Poker Online Event #7, someone folded pocket aces at the final table, with $576,251 on the line for first place.

Why would someone possibly fold the best hand with that much money for first place?

That brings us to a poker concept known as Independent Chip Model, or ICM.

This is a mathematical calculation for determining how much money a person’s chips are worth in a poker tournament.

(If you didn’t know, a poker tournament works slightly differently than your typical cash game of poker. The chips aren’t worth $1, $5, $25, etc. Instead, you pay an entry fee for the tournament and are given tournament chips that have no real monetary value. They are arbitrary values set by the tournament—so you might pay $500 to enter and get 10,000 in tournament chips (not $10,000 in dollars). The more you know!)

So, back to ICM.

Long story short, since the tournament chips don’t have real monetary value, ICM calculates the value of your chips based on the prize payouts and the number of players left.

And the guy who folded pocket aces? He was playing with ICM in mind and mitigated a precarious spot.

See, there were seven people left in the tournament, and he didn’t have that many chips left.

The prize payouts for the last few places were:

7th place: $120,918

6th place: $156,811

5th place: $203,358

4th place: $263,722

In this particular hand, where a player folded pocket aces, three other players ended up going all-in. One of them was the chip leader—he had the most chips left. Two of them only had a few chips left—they were at risk of ruin.

By folding pocket aces, our hero sat back and watched two people get eliminated by the chip leader, who significantly increased his chances of winning. If our hero had called, he also would’ve ended up losing the hand, and his tournament life.

(Spoiler alert: the chip leader after this hand ended up winning the whole thing.)

Having an acute understanding of the risk in this position let our hero finish the tournament in 4th place, securing way more than he would have had he taken the riskier route.

Now, he was widely criticized by the online poker community for folding pocket aces, because 99% of the time, you’re never folding pocket aces.

But this just goes to show how it can pay to have a deep understanding of risk.

Speaking of understanding risk…

My latest project, Market Pulse, is an automated market analysis that gives you daily summaries of market performance, expected outcomes for the next trading day, earnings reports, and much more to come.

I’ve been using it to track market performance and have been profitably day trading with it. Knowledge and data mitigate a significant portion of the risk that comes with blindly throwing your money into the stock market. Check it out here.

(This is not financial advice. Always do your own research & due diligence.)

I bring up my latest project, Market Pulse, for two reasons:

1. I want to share the incredibly profitable tool I’ve built.

2. It helps remove some of the risk of trading.

We’ve been talking about risk for a while now. And investing in the market is one of those things most commonly associated with risk. There are so many ways to invest in the market, and one of the day trading strategies I use is selling put spreads. This is an advanced options trading method that should be studied extensively before trying it out. But my new tool gives me insights into the market that help me make calculated decisions.

So instead of blindly buying Nvidia calls like r/wallstreetbets, hoping it will go up 20% in a day, I watch for specific market patterns and collect $150-$200 a day. By simply knowing key support and resistance levels of the market, and by having a strong understanding of what the most likely moves will be on any given day.

(Some people call this trading method “picking up pennies in front of a steamroller.” This can be true if you don’t know what you’re doing, but with the collection of data I use, it’s like knowing the path the steamrollers drive and avoiding getting run over. Work smart.)

Now, there is always the risk of a Black Swan event—an extremely rare event that causes the market to flip on its head (like Covid or the outbreak of a world war).

But these are generally one-off events that, by definition, you cannot prepare for.

So, excluding these one-off, unpredictable phenomena, one of the biggest risk mitigation techniques is actually quite simple: knowledge.

Knowledge of the markets, technical indicators, trends, patterns, and data.

Market Pulse does just that, all in one email.

And it’s how I mitigate risk as much as possible. So whether you’re a poker player, a day trader, or just someone looking to understand risk and live a less risky life, remember to avoid risk of ruin, build up knowledge around whatever it is you’re doing, and know that despite one-off, unavoidable events, you CAN reduce your risk footprint.

Here’s a quote that always stands out to me. Be bold. Try new things. Take risks, experience failure. Do what humanity is meant to do and explore everything this world has to offer.

Thanks for reading!

If you have any questions, hit me up on LinkedIn or on Twitter/𝕏 at @sam_starkman, or feel free to reply to this email!

— Sam