There’s a lot of truth in that old cliché about investing being a lot like the game of poker. Far from being a game of chance, poker is actually a test of skill, much like high value investing.
Wall Street legends like David Einhorn, Steve Schonfeld, Carl Icahn, and Steve Cohen count poker among their top hobbies.
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Vanessa Selbst, a three-time WSOP (something like a Super Bowl of poker) winner and one of the most successful female players of all time has been recruited by the Bridgewater hedge fund.
Meanwhile, according to academic research from 2019, hedge fund managers who have competed in and won prizes at poker tournaments outperform their colleagues by as much as 5%.
It could be argued that anyone with proficiency in poker could make a great investor and vice versa since it takes a certain type of person to succeed in these highly-competitive and challenging worlds. Beyond that, however, simply playing the game at a very basic level can deliver some powerful lessons that will make you a savvier investor.
Let’s take a look.
Define (And Stick To) Your Strategy
As neatly summarized by David Einhorn back in 2006, poker players – much like investors – adopt various strategies. There are some who play lots of hands and try to build up their winnings with small pots – the day traders in the investing world. Then some players will run with any Ace, King, or two-high card hand – long index investors with a propensity for trading too much. And then there are what Einhorn terms the “rocks”, players who sit back and wait for the highest value hands to make an appearance...
The important point here is that to get anywhere with investing, like poker you need to have a clearly defined strategy. If you’re going to start by making as many small investments as you can then that’s fine, but you need to stick with it for a while before you can properly analyse if it’s the wisest strategy to have.
Keep Your Emotions Under Control
Even the greatest professional poker players in the world know that possessing a talent for card games is not enough to generate a career, especially when it comes to emotional responses at the card table. It’s been said that Poker is 80% mental and 20% mechanical, making it a discipline that relies heavily on calm and measured decision-making even in the most emotional of plays.
See any similarities with the world of investments?
It’s all too easy to give in to negative emotions during a stressful situation and in poker terminology that would be heading into tilt territory. A player is unable to let the bad hands and losses go, so ends up making poor decisions and losing emotional control. According to Jared Tendler, author of The Mental Game of Poker, tilt can also occur when a player is winning a lot and overconfidence "shuts down" parts of the brain. This can lead them to take greater uncalculated risks.
Whether it’s a response to negative or positive emotions, tilt is still a response and not a decision. The moment you start to lose control, whether in the office or at the poker table, it’s time to call it a day and try again tomorrow.
Be Selective About The Investments You Make
There’s often an assumption about poker that to be any good at it you have to play every or as many hands as possible. This can lead some novices to the game to play every hand they’re dealt, even if it’s causing them to leak money and doing nothing for their game in the long run. The same happens when it comes to investments too, we’ve all heard stories about those over-eager rookies investing in everything that comes along.
In truth, however, the very best poker players fold over 90% of the starting hands that they receive during a game. Just because an opportunity to play arises it doesn’t mean it should be taken. Likewise, when it comes to making investments nobody should be purchasing stakes in every opportunity they research. A little analysis and planning are required to ensure that only the best opportunities that generate returns are pursued.
And finally, have patience. There are countless investors and poker players who are chasing immediate gratification, but they don’t realise that the two fields sometimes need years before they truly begin to pay off.
The sooner you get comfortable with the fact that not every investment will pay off in the end, the more you’ll be able to focus on the long-game. If you don’t, just like those poker players who try to rush success, you could stand to lose more than you’ll gain.