Investing like a poker player

I have a mild addiction to a dangerous sport – Texas hold ’em.

I don’t advocate gambling per se, which poker can be considered as, and I am not even a skilful player to begin with. But I do enjoy and appreciate the combination of luck and skill, and of course a bit of gamble, required in a game of poker.

It occured to me that perhaps I can improve my investing skills by playing poker. Obviously investing is not gambling, but I think there are some parallels between investing and playing poker and there are transferrable skills that can make me a better investor/poker player.

Let’s explore this fun notion below.

Emotions

Both investing and playing poker require the ability to keep emotions in check. Having a good hand or a bad hand can affect how we play out the rest of the game which could lead to different outcomes. A stroke of good luck could make us complacent and over-confident. This false optimism can affect the size of our subsequent bets and even over leverage. On the contrary, continuing to play on a losing streak in hopes of “recouping losses” is akin to catching a falling knife in investing.

Our emotions will most certainly skew our judgement but it’s also not just about how we react to our own hand but also how we react to what other players are doing or saying and choosing to let it influence our decision. As difficult as it is in investing, we must practise self-control, cut out the white noise, and remain as rational as possible.

Information Asymmetry

In a poker game, we only know our own hand and the open cards on the table, known as the flop (the first three cards), the turn (the fourth card), and the river (fifth and last card). Other players may subconsciously reveal their hand through their expressions or slight reactions (also known as tells) but otherwise, there is no way of fully knowing what they have at the get-go.

The cards on the table are like financial markets where information may be publicly available and accessible and other players with their cards unknown to us are other retail and institutional investors participating in the market. Likewise in investing, access to information and flow of information in the market is not perfect and knowing what we know or what we do not know will affect our decision-making.

Decision-making

In investing and playing poker, we are required to participate, either passively or actively, and make sound decisions throughout the entire process.

It could be right from the start when we decide not to partake in the game (company with poor fundamentals or unhealthy balance sheet not worth the investment), in the when middle when we choose to raise out bets (accumulate a larger position) when the odds are in our favour or folding when it is not (to cut losses). If we are feeling confident about our hand, we could also go all-in to maximise our returns (concentration vs. diversification)!

Whatever decision we make requires careful thought and consideration. We should not be investing blindly but always be mindful of our investment decisions so as to minimise risk and achieve big wins.

Uncertainty

Life is full of uncertainty, and so is poker and the stock market. Both require us to be comfortable with a bit of uncertainty. The ability to stomach some level of risk in exchange for reward is inherent to investing.

For sure we can do our best to make informed decisions but sometimes there are systematic risks or unexpected opportunities that come up along the way which are beyond our control for better or for worse. Thus we should understand own risk appetites and also accept the outcome and move on emotionlessly, whether or not the outcome is what we desire.

Stay vested but be prepared for the river card in investing

The river card is the last card dealt which could turn things around no matter how good/poor your odds of winning are. COVID-19 can definitely be considered a shitty river card dealt to all investors in March 2020 which resulted in huge losses for many. But for those that were vested in pharmaceutical-related stocks, COVID-19 was also the very thing that sent their portfolio values skyrocketing.

There is this saying in poker that you’ve got to give action to get action. While some investors may choose to wait on the sidelines for the market to correct to its all time low again before entering, I choose to stay vested and reap the rewards from a rising albeit volatile market. Meanwhile, I shall schedule my next poker game now to hone my gambling skills *ahem* I mean, investing skills. ’til then!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s