almost 3 years ago • 4 mins
Some of the most successful investors of all time are either astute poker players themselves (like David Einhorn) or regularly hire former professionals (like hedge fund giants Bridgewater Associates and Brevan Howard, to name but two).
In fact, an academic study recently found that fund managers who do well in poker tournaments also significantly outperform their peers in terms of investment returns. So I thought I’d investigate what lessons Texas hold ’em might hold for the likes of you and I when it comes to managing our own portfolios.
It’s simple really: investing and poker have a lot in common. Both are heavily dependent on luck for short-term success – but require considerable skill to win out in the long run.
The best players in both disciplines are experts at calculated risk-taking, as well as being keenly aware that technical knowledge and emotional control are essential factors in outwitting the opposition.
If you want to minimize the impact of luck and maximize the impact of skill in your approach to investing, these five specific lessons from the world of cards may well help:
Bad decisions can have good outcomes and good decisions can have bad ones. You may have a weak hand, go all in and still win the chips – but that doesn’t mean it’s always going to be a good strategy. You could similarly invest all your savings in a highly speculative stock and maybe make a fast fortune. But abandoning diversification and passive investing entirely is much more likely to be a road to ruin.
One secret to better decision-making may be to ask yourself what would happen if you tried the same play a hundred times. You can’t fully control results, particularly in the short term, but you can control the process. And if you’ve got a good process, good outcomes will eventually prevail.
When you see a stock price soaring, it’s all too tempting to buy in before taking the time to do some proper research. Our brain chemistry, meanwhile, means panic naturally kicks in when markets temporarily sell off. I’d argue that in both poker and investing, emotional control is at least as important as analytical ability.
The best poker players play the same no matter which way the last hand went. In order to be successful in either game, you have to first identify the behavioral biases that risk holding you back and take steps to reduce their impact. I’ve personally found that running through a behavioral checklist before making any investment decision helps me avoid making potentially costly mistakes.
In poker, it’s known as “game selection”. You want to sit at a table with lots of “fishes” (players you can profit from) and relatively few “sharks” (players who might take a bite out of you). The more active your investment approach, the more sharks there will inevitably be in the water – but the more mainstream your investment universe (or ocean, perhaps), the fewer fish you’ll encounter.
My takeaway is that you should either play it safe with a predominantly passive approach or else find a niche where you can develop an edge. And remember the old saying: if you can’t spot the sucker in any given situation, then it’s probably you.
In poker as in investing, you don’t have to play every hand – instead, you’ve got the luxury of waiting until the odds are stacked in your favor. As the legendary Warren Buffet once said, “the stock market is a device for transferring money from the impatient to the patient”.
You don’t have to have all your money invested at all times, and if things aren’t looking auspicious then you might be better off sitting on the sidelines. Keeping some powder dry also allows you to fully capitalize on the really big opportunities when they appear – and they will.
As professional gambler Nolan Dalla once put it, “most profit at the poker table comes not from our own brilliance, but rather from the mistakes of others”. Don’t just focus on the cards or asset prices: look at what other players are doing. Poker legends know how to read a room and spot a bluff – and top investors similarly have to learn how to interpret market sentiment and realize when fear or greed are dominating price movements.
So there you have it: five lessons from poker for investors. Be lucky – and if you can’t be lucky, be smart.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.