"Raise Your Game" - DON’T GO FOR BROKE!

When approaching any type of venture that involves risk capital, be it investing, trading, gambling, starting a new business, etc., the most elementary concept, yet the most powerful, is money management.

Your available capital in trading and investing, your bankroll in gambling, or cash flow with the start-up company is the life line to success and the cornerstone to making the most logical and correct decisions that will guide you along the most profitable path.

Without proper money management, many of the decisions you make may be clouded by irrational or emotional behavior that can lead to undesired outcomes.

So, what course of action can you employ to prevent or minimize mistakes on your decision making processes and limit subjective reasoning?

Let’s set a poker scene to illustrate a perfect example of the money management effect.

You decide to sit down at a $5-$10 No-Limit Hold’em cash game table with your entire bankroll of $5,000, which is at risk throughout your session. You are dealt Ace of diamonds and King of spades on the button and raise 2 limpers to $50. Both of the blinds fold, but the two limpers call your raise, bringing the pot to $165. You do not know much about your two opponents, but you see that they both have your bankroll covered.

The flop comes, King of clubs, 8 of clubs and 2 of hearts, a very good flop for your hand, giving you top pair and top kicker.

Both of your opponents check to you, and you decide to bet $150. The first player folds, but the other opponent decides to raise. Your opponent raises an amount that puts your bank roll “all in”, which amounts to $4,800 more!

The action is back to you ... what do you do?

Well, it would seem like your opponent has your big pair beat and the prudent option is to fold. You have only 1 pair (right?), albeit the best pair and best kicker.

But let’s go one more step; say that your opponent shows you his hand, the Ace of clubs and 5 of clubs!

Would this make your decision easier?
It sure would: your opponent is on a club flush draw. You are a 2-1 favorite, 66% (9 possible clubs left in the remaining unseen deck, twice) to win the entire pot and double up, and all you need to do is avoid a club on the turn and river and you will be raking in a mountain of chips.

So why haven’t you called yet? Most players relish this scenario. Are you starting to get a lump in your throat, maybe sweating profusely? Sure you are, your ENTIRE bankroll is at stake!

If you call and that club comes (there’s a 33% chance this will happen), you’re done! Are you willing to risk your entire stake, your lifeblood, right here, right now? If you get unlucky and your hand does not hold up this one time, you will be wiped out!

The logical and mathematical play is obvious, you call! You are getting better than even money on the pot ($5,265 in the pot versus $4,800 to call, making it 1.096-1), and you’re a 66% favorite to win! This is a huge positive expected value.

Your opponent is gambling on a draw into your made hand. Can you see what predicament you have put yourself in? You have changed the paradigm, cluttered with subjective reasoning (your emotions and mental state have now become a factor because of the possibility of financial ruin), when clearly the mathematical edge objectively is to call the bet 100% of the time.

In fact, the long run specifically makes you a huge winner as you increase the frequency of being involved in this same scenario. If you play out the same scenario 100 times, you should win close to 66 pots, losing 33 pots roughly, making each individual outcome essentially a non event, removing the emotional aspect from your decision making.

So how do you effectively manage this scenario where you can correctly make the decision and call 100% of the time and feel comfortable about it as well?

Simple: you never ever put your entire bank roll in play.

Let’s use the same scenario, but now you buy-in using 5% of your bank roll, $250. (Obviously you will be stepping down in limits).

Now when you get involved in this same scenario, I am sure without hesitation, you will call 100% of the time. Why? Because you know there is huge value in calling, and if that flush does come, it may sting a little, but won’t devastate. You still have 19 buy-ins left.

And the best part, over the next 19 similar scenarios, the probability will approach the 66% favorable edge, and you will win close to 13 out of the 20 hands, increasing your bankroll.

When trading and investing, it is vitally important that your decision making does not become clouded and skewed by risking a significant amount of your account on any one position.

Emotional behavior always distorts objective reasoning.

You never want to be in a trade that you believe has a good probability of a profitable outcome, but may initially move against you to the point that emotional judgment overtakes your actions.

Possibly, your decision variables may still confirm your initial action; however the emotional response can trigger an untimely stop/loss.

The smart play in the above scenario would have been to never put yourself in that position to begin with. Just as you should never put a significant percentage of your account into one trade, you never want to sit down at a poker table where joining the game requires playing with a huge portion of your bank roll.

In other words, never over-commit your capital on any single position and you will find yourself making better objective decisions maximizing the edge for success.

Always remember to focus on trading with your head, and not over it.