Why Great Poker Players Make Great Investors

If you’ve been anywhere near cable television in the last couple of years, then you know poker (Texas Hold ‘em, to be specific) is one of the fastest growing spectator sports ever. How else do you think the networks could justify a ‘World Poker Championship’ every single week, when most conventional sports only get one a year? Plus, it’s easy to get hooked, if only by the sheer amount of money at stake. After all, by the time poker tournaments get to the final rounds we see on TV, the size of the pots can be more than most people make in a year. But even without a large pot, there’s just something about seeing real people react when they lose or win real money. It’s just compelling TV. 

We bring it up today only to make a simple point - the world’s best card players are also pretty likely to make good investors. The tools and the arena are obviously different, but the core winning philosophies of investors and card players are actually quite similar. Let’s compare and contrast the two…we think you’ll find it enlightening. 
  
Good Trading Isn’t Gambling…Good Gambling Isn’t Even Gambling 
 
When we first kicked around today’s topic as a possible article, we were admittedly a little hesitant. Why? One of the issues plaguing investors since the mid-90’s - when the internet made it so easy and cheap to trade - has been the mentality that the market is a casino. On the surface the analogy seems harmless, and maybe even a little fitting. In both cases, you put some money on the table, and you might win some more, or you might lose some. A few people wind up rich, and a few people may end up broke, having been unable to know when to quit. Most folks usually find themselves somewhere in between. There’s always a risk for everyone, and there’s always a reward for someone. Isn’t that an appropriate description for gambling as well as investing? 

The problem arises when a investor or investor starts to truly think and act like the stock market is a casino. Once a investor starts to pick stocks like he or she picks a roulette number, then odds are (no pun intended) the person is near the end of their investing career. It doesn’t take any real effort to place a bet in a casino. It should take at least a little work - and time - to be an active investor. That’s one of the key differences between the folks winning and losing in the market. Sorry if it hits close to home, but it’s the truth. 

Noticed we haven’t used a particular ‘g’ word yet? It’s no accident. While it’s tempting to compare the perils of the stock market to the risk of gambling, our topic today is what we can learn from the great card players…not the average ones. To the great card players, poker isn’t gambling. It’s a process, or it’s an odds game, or it’s statistics, or it’s a defined strategy. But to world’s best players, no, it’s definitely not gambling. Oh sure, procedurally it’s the same steps that millions of card players take every year - you ante up, the dealer gives you some cards, you keep them or you don’t, and then one person ends up having the best hand. You can broadly define the steps as gambling. However, the business of poker - the strategy - is not something the top players leave to chance. THEY ALWAYS KNOW THEIR ODDS, AND PLAY THEM APPROPRIATELY. If they have a strong hand they’ll play it aggressively, or if they think they can bluff a good hand, they’ll stay in the game. But if Phil Ivey has an off-suite 5 and 8 and the player right in front of him makes a strong but not excessive raise, Phil’s going to fold. A gambler might stay in the game to ‘see what happens’. A professional won’t bother taking a chance on what he or she knows will probably be a losing hand. Big difference. As an investor, are you sticking with hands you know are weak just because you want to see what happens or can’t stand the thought of cutting a loss?  
  
Desirable Traits  

Kenny Rogers said it best - you got to know when to hold ‘em, know when to fold ‘em (insert groan here). As painful as the cliché is, it’s still true. A good poker player is willing to fold a weak hand early, and just accept the small loss of the initial ante. These guys know there’s going to be a big pot later in the game - they just have to stay in the game to have a chance at it. Whittling your money away early is a quick way to get yourself unseated, and pass up your chance at the really big win later. 

On a similar note, card players have patience. They need it badly, in fact. Most stock investors lose about half the time. In the grand scheme of things, failure half the time seems like it would eventually eat away at your confidence. But, it’s just one of those things you learn to accept, since on the other 50 percent of your trades, you make so much more than you lose. Know how often a good poker player wins a hand? About 20 percent of the time. Yes, a card player definitely knows how to handle losses and still keep the bigger picture in mind. As a investor, are you prepared for the same?  
  
Redefining the Rules 

One final thought, and we want to preface it by saying a good investor always needs to be wise as well as realistic. So, don’t take this literally in every sense, but…the better the hand, the bigger the bet. 

At a poker table, hearing the phrase ‘I’m all in’ is certain to create some tension…for everyone. It just means that player is putting every single one of his chips into the pot, and the other players can match the bet, or fold. On a rare occasion, an ‘all in’ bet is a bluff. But the vast majority of the time, it’s a sign the player thinks he’s got the strongest hand of the game. Is it a wise move? Most investors would instinctually say it wasn’t, as it presents too much risk. However, that’s the result of hearing ‘diversify’ and ‘consistency’ for years. Being diversified and consistent is indeed prudent, but taking advantage of a real opportunity is also prudent. In fact, there may be instances where it would be a mistake not to go all in. If you’re holding a royal flush - the strongest of poker hands - and there’s literally no way to lose, you should bet it all. The worst that could happen is the remaining players also have the same hand, and you split the pot with them. It’s very rare to see a royal flush, but it does happen. When you have a sure thing, the smartest thing to do is fully take advantage of it. 

Now as investors, there’s never a sure thing, and the market is never going to split profits with you. But, the principle of a bigger bet is still applicable. 

Let’s face it - you feel better about some of your positions than others. Certainly you like them all, but some of the stocks just have better odds and/or a better history than others do. Are you treating them all the same, or are you adding a little extra capital to your best stock ideas, and scaling back on your less-than-ideal trades? Many run-of-the-mill advisors would tell you you’re playing with fire if you start to toy with your allocation size, but most professional investors would actually tell you they overweight a position under the right circumstances. They up the ante, so to speak. 

That’s not an encouragement to go out today and put all your money into one stock, even if you are sure it’s a can’t-lose situation (which as we said, doesn’t exist). But, it is permission to at least think about scaling into trades or ideas that are working a little better for you than others are. As we mentioned, you still have to be wise and realistic, so diversity is still critical. But, are you tweaked for maximum profits? Professional card players, hedge fund managers, and professional investors all adjust the size of their bets to reflect the strength and potential of the opportunity. 

The bottom line is this - you can call the market a casino if you want, but that’s not what it is. It’s not rigged, nor is it biased, and it’s not glorified guesswork. It just feels that way if you don’t know how to play the game. Even then, the name is just semantics. The real question is whether or not you treat stock investing like gambling. If you do, then shame on you. The world’s best poker players don’t even treat a card game like gambling, which is why it’s the same eight players sitting at the table each and every week on TV (proving it’s not luck). For them, they’ve turned gambling into a business. Have you turned a business into gambling?  

(Originally appeared at smallcapnetwork.com)