This month marks the beginning of yet another World Series of Poker in Las Vegas. Early reports say that attendance is up 26% from last year, when Australian Joe Hachem took home $7.5 million by winning the No Limit Hold 'Em final event. And it all has me thinking of Chris Moneymaker.
A Rule Breaking bet
You remember Moneymaker, right? He won the 2003 tournament thanks in large part to a hand that has become known simply as "the bluff." Moneymaker was heads-up at the end of the main event with veteran pro Sam Farha. About halfway through their duel, Moneymaker was dealt the four and seven of spades -- a modest, speculative hand that you'd typically prefer to play against a lot of opponents. Farha does better, picking up an unsuited king and nine. When the first three cards -- "the flop" -- come two-nine-six with only one spade, Farha has the top pair and second-best kicker. That's a strong heads-up hand. Moneymaker has nothing. He needs either two running spades to make a flush or two running low cards for a straight. He's a long shot, at best.
Predictably, Farha bets. Moneymaker has a big chip lead and thus calls. Silly? Maybe, but 19 of the remaining 47 cards can materially improve his hand. (That is, any spade plus the non-spade fives, eights, and 10s.) He gets one of them with the next card: the eight of spades. Suddenly, he has a huge hand -- good draws to both a flush and a straight. Farha, however, still leads and bets $300,000. Moneymaker raises $800,000, which appears to be about one-third of the chips remaining in Farha's stack. He calls, correctly figuring he still has the best hand. What happens next, however, is the stuff of legend.
The final card is a completely harmless three of hearts. Moneymaker now officially has nothing. First to act, Farha checks. Without hesitation, Moneymaker bets it all. After deliberating for a few excruciating minutes, Farha folds. It was the turning point of the event and led to Moneymaker's $2.5 million victory.
Crazy? How about crazy like a fox?
We simply have no way of knowing what Farha was thinking when he laid down the best hand. Nor can we know what Moneymaker was thinking with the all-in bet. But it would be simply wrong to conclude the affair was a matter of feel. Sure, that played a part. But so did the situation.
The point is: There were dozens of ways for Moneymaker to analyze his position and, especially after the fourth card, his chances to win. It may not look like it on TV, but every great poker player -- especially the odds-calculating No Limit expert -- has an analytical side. And so does the Rule Breaker investor.
A science and an art
That's because failing to think through every profitable scenario can cost you at the poker table. It can be equally costly in Rule Breaker investing. For example, loading up on shares of Ballard Power
The Rule Breaker instead imagines outcomes under which a speculative stock like Sirius Satellite Radio
Short-stacked and all-in but with lots of outs
Developing a valuation thesis for a Rule Breaker is a lot like counting your "outs" -- that is, the cards that can improve your hand -- in poker. Often, they're hidden. Go back to Moneymaker's four and seven of spades. With two-nine-six on the flop and only one spade, most players would throw away that hand to any bet. They'd probably conclude they were too far behind. And they'd be right from the standpoint of immediate outs. The three remaining fours and sevens probably wouldn't help much. But this is also very short-term thinking, especially when it doesn't cost much to see another card.
Now consider Motley Fool Rule Breakers recommendation Exelixis
Well, they could be right. But that's hard to imagine, with the number of outs available to Exelixis. First, it will have five cancer drugs in phase 2 trials by the end of the year. Second, the company has high-quality partnerships with leading pharmaceutical firms, including GlaxoSmithKline
In sum: The shorts must be absolutely correct to profit from their doomsday predictions. That's why Exelixis is a Rule Breaker. Not because it's the Next Big Thing.
Go all in
Like No Limit Hold 'Em, Rule Breaker investing is for the advanced student who isn't afraid of some volatility in his or her holdings. It's demanding, but it can also be richly rewarding. Just ask David Gardner. Many of his earliest bets have paid off in multibagger fashion. And now the current Rule Breakers portfolio has found four more in fewer than two years. Find out who they are with 30 days of free access. There's no ante, and no obligation. Click here to join the game now.
This article was originally published on August 12, 2005. It has been updated.
Fool contributor Tim Beyers never check-raises the flop, only the turn. And if you believe that, you're invited to play poker with him. Tim didn't own shares in any of the stocks mentioned in this story at the time of publication. You can find out what is in Tim's portfolio by checking his Fool profile. GlaxoSmithKline is a Motley Fool Income Investor recommendation. The Motley Fool has an ironclad disclosure policy.