Why to Invest in Something Risky Like a Game of Cards
07/11/2013 | FxM – Evan Brock Gray
In this game, two cards are for you (and only you), five cards are for everyone to use as best they can and there are four rounds of checking, betting, raising, folding or just going all-in. Everyone needs to know concepts like “the flop”, “the turn” and what happens on “the river”. Oh yeah, and there are always two blind people playing this game, but one is bigger than the other. Sounds like a weird, complicated game, right? Want to play? You can make a lot of money… even if you don´t want to play.
For those of you who haven´t caught on, the game in question is Texas Hold ´em poker. This popular variation of the traditional poker games is dated to very beginning of the 20th century and supposedly comes from Robstown in South Texas. With 23-year-old Ryan Riess of Clarkston, Michigan being crowned (well, actually a bracelet is awarded) the 2013 World Series of Poker (WSOP) champion just last night, it might be interesting to know this massive tournament with 79,471 entries in 62 events is worth of lot of money: over $197 million dollars. If you can make it to the last table with nine players at the Rio All-Suite Hotel & Casino in Las Vegas, there is over $26 million to play for and if you win, you get to take home a cool $8,400,000.00. That was pretty good for Riess for just 3 and ½ hours´ work against his final opponent.
All that being said, normally you will need some of your own money to get started. The $10,000 buy-in fee to the Main Event has to be paid somehow. So how do you do it if you don’t have a giant savings account, rich uncle or a friendly bank manager? You find investors. That´s right, there are people willing to invest in amateur and professional pokers players. This is where the man, Jay Farber, who came in second place´s story comes into play. Farber knew he needed to find the “10 grand” in capital so he did what other players have done in the past when they were a little short. Just like a new business searching for venture capital, Farber sold some of his expected earnings as shares. That means his backers (investors) would receive their initial investment back a return-on-investment (ROI) if Farber was able to make more money than the original entry fee.
Talk about betting on the right horse. His investors must be very happy with themselves today. Farber´s second prize winnings totaled $5.2 million dollars, or 520 times the initial investment entry fee, most of which will have to go back to his backers. But let´s say you and eight friends decide to invest $1,000 each in Farber so he only has to pay $1,000 of his own money to play. How much would you get back on your investment, what would your ROI be and, therefore, how efficient is it to invest in a second-place WSOP player?
How much money everyone gets back depends on Farber´s winnings or, in other words, the return. Since Farber won $5.2 million, subtracting the initial investment of $10,000 and dividing that total among the 10 investors would give everyone $519,000! Return-on-investment is actually an efficiency ratio or percentage which tells you how good (or bad) an idea it was to make that investment by comparing the net return to the initial cost. Since you made a net return of $519,000, you divide this by your initial investment of $1,000 to see that your ROI would be 51,900%. Expressed as a 519:1 ratio means for every dollar you invested, you got back $519.
Considering that if you invested that $1,000 in a stock market index, the Dow Jones Industrial Average (DJIA) for example, and the return for that index in 2012 was 10.16% (7.26% return 2.9% in dividends), you now know why investing in a poker player could be more lucrative than investing in the stock market (since you only get $101.60 back from the DJIA). That investment would take a full year; investing in the WSOP Main Event would take a matter of weeks. The returns speak for themselves. But here comes this investing disclaimer: there is a lot more risk (thus, the greater reward) for your investment in a poker player than there normally is in the stock market. So, just like with any investment, do your homework to find someone/something you think will be a winner, project your ROIs and consider the level of risk you are willing to take.
So, when investing in something so risky, the famous words of a Dirty Harry will be useful to remember – “You´ve gotta ask yourself one question: Do I feel lucky?” Well, do ya… punk?
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