Poker and investing. Two things near and dear to my heart. If I had to guess, I’d say I’ve dedicated more time to poker and investing over the past 10 years than anything other than sleep. To the casual observer they may seem completely unrelated. However they are more closely correlated than even those who are familiar with them both realize.
I’ve been playing poker since the early 2000’s. In basement games with a group of friends, in trips to the local casino and until the U.S. government stuck regulation into the fine print of a bill passed in the middle of the night, I also played on the internet (sorry, I’m still bitter). In my time studying and playing the game I’ve come to realize that the skills and traits needed to be a winning poker player are the exact same skills and traits needed to be a successful investor. Both are part science, part art. If you put your money in play in either arena without knowing what you’re doing you’re sure to end up broke, but if you have a good knowledge base behind you, you’re sure to see your bank account grow.
Here are the top skills I’ve learned from playing poker that have made me a better investor.
Understanding Statistics – The Law of Large Numbers: Basically, the law of large numbers states that the more times you run an event, the closer the expected outcome will be to the expected value. For example – everyone knows the probability of a coin flip landing either heads or tails is 50%. If you flip a coin 10 times it wouldn’t be a shock for the coin to land heads 100% of the time, but if you flip that coin a million times you will see that the amount of times it lands on heads becomes extremely close to 50% of the flips. Understanding this concept can help in many ways. In both poker and investing it’s very easy to become too focused on short-term results and ignore the bigger picture.
It doesn’t matter if you got lucky to win a poker hand after completely misreading your opponent, or made a very speculative stock pick that ended up paying off for you. Don’t focus on short-term wins and losses, focus on making the best possible decision for stable, long-term success.
Removing Emotion from Decision Making: Being able to stay in control and not let your emotions get the better of you should seem pretty obvious. But anyone who’s ever held the nuts in a big pot, or anyone who’s stared at the stock ticker with their mouse cursor hovering over the buy/sell button knows this isn’t so easy. Decisions should be made on analysis, not emotion. A few years ago on one of those days where the stock market was absolutely tanking, I watched the woman who I shared a cubicle with call her broker and sell every investment she owned. She panicked and locked in whatever large losses she was suffering at the time. Had she remained calm and trusted her financial plan she would have weathered the storm and been able to enjoy the huge run up in the market in the months that followed.
Knowing When to Fold’em: In poker, most players know that sometimes a hand that starts out with a great deal of promise just isn’t worth much once the action starts to play out in front of them. Two aces may be the best hand to start with, but knowing when they’re beat and throwing them away can be the difference between winning and losing.
The same is true in the financial world. A stock or fund may start out as a great investment with a lot of promise, but over time the fundamentals may change and the investment may not be profitable. Good investors will have no problem cutting their losses and searching out a more profitable opportunity.
Constantly Managing Risk: Whether its managing a bankroll and not playing in games you can’t afford, or making the best possible decisions by adapting to new information as a hand plays out. Managing risk is a key element to being a successful poker player. For investors its very much the same. Be it through asset allocation and spreading your risk out among asset classes, or by managing the amount of money you invest in regards to your overall financial situation. Limiting the amount of risk you expose you (and your money) to is one of the most important things to consider when deciding what to invest in.
Recognition of high probability situations: It’s a bit trickier in the investment world than it is in the poker world. But being able to recognize and put your money into play in 60/40 situations (meaning you have a significant advantage) will result in your best investments. Sometimes this means keeping your money on the sidelines and passing up an investment that’s only slightly favorable (51/49, if you will) and waiting for a better one to come around.
Money That’s In the Pot is No Longer Yours: This ties in to knowing when to ditch a hand or an investment, but its something I still struggle with so I wanted to break it out on its own. Once you purchase an investment, that money is no longer yours. You have given it to the market. What the market does with it from there is completely out of your control, you’re just a passenger along for the ride. How much you’ve gained or lost since the time you bought an investment is completely irrelevant to whether you should hold it going forward. That decision should be made based solely on the future prospects of that investment. I have a few stocks in my IRA that I bought during the market crash in 2008 that have since risen about 200% from where I purchased them. And while seeing that number makes me smile every time I log in to my account, it has no bearing on whether I should continue to hold that stock. If something fundamental changes with the company this week that will make it an unattractive investment going forward I should be willing to part ways and start the search for a more lucrative option.
Discipline: Finally, the most important skill of them all, discipline. In poker and in investing it’s absolutely critical to be disciplined and stick to your strategy. Talking heads on the news networks, friends, coworkers and your own emotions will try to sway you away from your strategy and into whatever the en vogue trend of the week is. It takes a lot of discipline to tune out the outside noise, stick to your strategy and maintain focus on some of the things listed above. The more disciplined you can be, the more you’ll be able to maximize your returns. Both at the poker table and in the market.
This is a topic I’ve wanted to write about for a while now and I could probably write an entire book on the similarities between poker and investing and what’s needed to succeed in each. I hope this article made sense and I hope just about everyone will be able to take something away from it. I’m lucky enough to have two hobbies that I find incredibly interesting and actually make money from. I guess I can’t ask too much more than that.
I’d love to hear your comments on the topic, and am always willing to talk poker or investing with anyone. So leave a comment below or reach me on twitter!