Poker is an insanely exciting game - especially when the stakes get high. And when the stakes get high, poker also turns into an intensely nerve-wracking game, and not all of us have the balls of steel it takes to compete at these levels - but that doesn’t mean we can’t experience the action.
In almost all high stakes tournaments and many high stakes cash games, players will sell action so that they can participate in competitions without putting too much of their bankroll at risk. While the action is readily available for sale, not every investment in these arenas will be a good investment.
This article is going to teach you what to look for and what factors to consider before investing in, or betting on, other players.
The information I’m about to provide you is absolutely crucial because just like we can overexpose ourselves to risk in our own play, you can make seriously bad calls when you invest in other players - even when they are considered the best players in the world.
We’ve discussed in previous articles the importance of proper bankroll management when approaching this game as a professional. Your bankroll is, after all, your lifeblood. By following good bankroll management, you can get a piece of the action many times over. As long as you are focusing on investing your money in good spots, you can expect to come out ahead in the long run, while enjoying plenty of excitement in the short term. This gives you the best of both worlds: tons of fun and entertainment and a bit of positive expected value on the side.
There are 2 ways to invest in poker players:
Backing/Staking. Putting up all the capital, and receiving a portion of the winnings. In the case where a player is down money, they are in what is called ‘makeup’. While in makeup, all winnings will go to the backer. It’s only once the makeup is ‘cleared’ that winnings (or true profits) be split at the agreed upon rate.
Investing/Buying Action. This is where Investors buy ‘pieces’ of percentages of the player’s action. This may be as small as 1% or as high as 99%. In this model of investing, each event is independent, and there is no such thing as makeup. The player and the investors each take on the amount of risk that’s comfortable to them, and at the end of the session or event, the profits or losses are split up according to the percentages.
I’m going to focus on the second method of investing today, as it’s much easier to get involved in and requires much less commitment than the first method. We will investigate the ins-and-outs of backing in a future article.
When buying action, the player has an option to choose the price at which to sell. Let’s take the example of a $1,000 tournament. 1% of the action would cost $10. But if the player expects to have a 10% return on investment in the tournament, then 1% of the action is actually worth $11.
The return on investment is how much a player expects to make on each dollar as a result of playing the event.
If they have a big advantage (or ‘edge’) on the field, this number may be over 100%. However, if they are a field underdog, then this number may be negative.
This is where things get interesting. By playing the event and applying their ‘skill edge’ (if they have one), the player is generating a positive expected value on every dollar invested. To accommodate for this, most players will sell at a ‘markup’.
So maybe instead of charging $10 for 1% of the action, the player will charge $10.50 for each 1% of the action. That way the player and any investors are splitting the expected value or the expected return on investment.
For every $10.50 the investors put in, the investors expect to get $11 back.
The markup is simplified to a number, in this case 1.05. If the player were charging $11 for every 1%, the markup would be 1.1. If the player was charging $15 for every 1% the markup would be 1.5. And so on, and so forth. You get the idea..
This is very important because the markup determines how much of a premium the investor must pay to invest in the player.
In the example we have where the player has a 10% ROI, any markup between 1.01-1.09 is fair, as both sides are expecting to make a profit. A markup of 1.3 in an event where the expected ROI is 10% however, would be a very bad deal for investors and a very good deal for the player.
Typically when figuring out ‘fair’ markup, the player assumes their ROI and sets their markup at the middle ground (like the 1.05 in our example with the 10% expected ROI). This has become the market standard, but in my opinion, as long as both sides are seeing a positive expectation, any markup is cool.
Another thing to consider is how much the player needs the money; how badly they want to play this event. In the case where they are a bit more ‘desperate’ for the investment, it would make sense to choose the lower end of the markup (1.01-1.03 in this example). However, if they can play the event on their own dime anyway, and they’re mostly selling to give their friends a friendly sweat, then they can justly choose the higher end of the markup (1.07-1.09, in this example).
Ultimately, it’s up to the investor if they want to buy, and up to the player if they want to sell.
The free market determines if money will change hands, and if that’s taking place, it doesn’t really matter if other people think it’s ‘not fair’.
They key questions to ask when deciding whether or not to invest in a poker player are:
What is the expected return on investment?
What is the markup?
What can I afford?
How much variance is involved?
When the ROI is greater than the markup, you’re looking at a positive investment.
When markup is greater than the ROI, you’re looking at a negative investment.
Simple as that. Right?
Just because it’s a positive investment doesn’t mean you should take it. This is because question #3 and #4 are key factors for investing. Just like you should never risk more of your bankroll than you can afford to lose on one session, you should never risk more of your bankroll that you can afford to lose on one player, or package. Even if you’re betting on the best player in the world, and you’re getting a sweet deal on the markup, that doesn’t guarantee your investment is going to pay off.
This is poker, and anything can happen. Even Charlie Carrel can get set over set in the first level of the softest tournament in the world, and odds are he’ll be eliminated.
There are some major keys to understand before investing in a poker player. Don’t ever think that your bet is a sure thing because someone is on a hot run right now. (Remember, anything can happen.) Likewise, the more events you can invest in, the lower your variance will be because over the long run, as players get to play more hands, they are more likely to realize their expectation.
In the short run (few games), variance and luck are the biggest predictors of results. In the long run (many games), expectation and skill are the biggest predictors of results.
So while you might not win as much off a single event by spreading out your investments, you will win much more often, and when you lose it won’t hurt as much. The bigger the skill advantage, the better the structure, and the smaller the field, the lower your variance will be. But never fool yourself into thinking that variance doesn’t exist at all.
Remember, the more events you can get a piece of (or the more bullets you can get a piece of someone in a cash game), the lower the variance will be. If the first one doesn’t work out, you have another chance for them to realize their expected ROI next time.
It’s easy to get seduced by the idea of making a great bet and effectively winning the lottery, but when we make bets like this, we are more likely to feel great pain than great gain. Since we as humans fear loss more than we enjoy gain, you’re actually much better off taking a conservative approach.
When it comes to investing, and when it comes to money, decisions should be made by the brain - the rational part of the mind. Save the emotions for your relationships, they have no value in the world of finance.
I recently started investing in some of my star pupils, which I talk about in this video.
In the past I would get the F.O.M.O and buy up any action I saw on social media or staking sites, without taking the markup into consideration. And it’’s hard to consider this at first, because you don’t fully understand what it means, or know how to calculate someone’s true ROI in an event when there are so many factors to consider.
Here’s an example:
I wanted to buy Parker Tonkaaap Talbot’s action on a Sunday and I felt 1.2 was a fair price. But once I saw I was getting outbid, I started bidding 1.3, because I simply got caught up in the emotional state of wanting to have a piece of the action, and let my rationality slip away. I didn't ask myself "is he still a good buy at 1.25? what abuot about 1.3?"
If you’re going to be dealing with dollars, then discipline is key.
You have to recognize when something is no longer profitable. You have to be willing to say NO when that happens. Even if they end up winning big on that event, it doesn’t mean you made a mistake. You can’t predict what’s going to happen on any given Sunday. You can only predict what someone’s ROI will be in the long run. Anytime you can buy them at a lower rate than this, and your bankroll allows it, you are good to make the investment. Anytime they are charging a higher markup than what you believe their ROI is, you’d be better off passing on the investment, regardless of your bankroll situation.
It’s very easy to overinvest because we’re flush with cash from a big score, but that is the easiest and quickest recipe for giving all that money back to the game.
Key factors to predicting someone’s ROI:
→ Skill of the player
→ Skill of the competition
→ Structure of the event
→ Mental state of the player
→ Amount of their action are they taking
→ Mental state of the competition
These factors will help you determine how big their edge is, and how well they will perform in the event. Knowing the skill level of the player in general isn’t enough to make a good investment. You want to know how well they are going to play on that day (Even Daniel Negreanu has days where he doesn’t bring his A-game. Would you want a piece of him on one of those days?)
Of course, knowing someone’s state-of-mind is a little harder to gauge than the average expectation because it requires talking to them directly. Social media and listings only tell part of the story, and if you really want to know how someone is doing mentally, physically, and emotionally you need to talk to them directly. These are major factors to consider because they will drastically affect someone’s ability to play great poker.
Before investing in a player, try to find out how focused, how confident, how energized someone will be. This will help you evaluate their true return on investment for this particular event, which will help you determine if this event is a good event to invest in.
It might be a bit of extra work, but it’s worth it. If you’re going to invest your hard-earned dollars, you should be willing to do your research.
Investing in poker players can be a very exciting way to make money. But like anything else, you need to understand the product before lending your funds - or you’ll just be giving your funds. You also need to know the premium you’re paying for the investment and how much risk you can tolerate, given your bankroll and life situation.
This article should help you determine these factors. If you’d like to invest in some poker players, check out stakekings.com where Charlie Carrel and Ben Heath are both selling action for their Pokerstars Championship Events. #GetStackin
If you have any questions, comments or personal experience with the topic please post in the comments section!