Your Ace In The Hole: Eight Things Poker Can Teach You About Investing

Your Ace In The Hole: Eight Things Poker Can Teach You About Investing
Reda Farran, CFA

4 months ago7 mins

  • Investing and poker have a lot in common: both involve calculated risk-taking, require keeping emotions in check, and are heavily dependent on luck for short-term success – but need considerable skill to win out in the long run.

  • That’s why some of the most successful investors of all time are also astute poker players. In fact, an academic study found that hedge fund managers who do well in poker tournaments also boast significantly better investment returns

  • Key lessons from poker applicable to investing include: control your emotions, diversify your bets, find and stick to a niche, focus on the process (not the outcome), distinguish between luck and skill, be patient and wait for good opportunities, read the market, and know when to cut your losses.

Investing and poker have a lot in common: both involve calculated risk-taking, require keeping emotions in check, and are heavily dependent on luck for short-term success – but need considerable skill to win out in the long run.

That’s why some of the most successful investors of all time are also astute poker players. In fact, an academic study found that hedge fund managers who do well in poker tournaments also boast significantly better investment returns

Key lessons from poker applicable to investing include: control your emotions, diversify your bets, find and stick to a niche, focus on the process (not the outcome), distinguish between luck and skill, be patient and wait for good opportunities, read the market, and know when to cut your losses.

Investing is all about playing your cards right, and so is, well, playing cards. It’s maybe not surprising, then, that some of the most successful investors of all time are also astute poker players. In fact, an academic study found that hedge fund managers who do well in poker tournaments also boast significantly better investment returns. So I decided to spend some time around a green felt table, and came away with eight lessons from poker that you can use to improve your investing game.

1. Control your emotions.

Both poker and investing can be emotional roller coasters, but it’s vital to avoid making decisions based on fear, greed, or ego. In fact, emotional discipline arguably is at least as important as analytical ability when it comes to poker or investing. It helps you stick to your strategies and avoid what poker players call “tilting” (that is, making irrational decisions). Think of it this way: the best poker players play the same no matter which way the last hand went. Similarly, emotional control ensures that investors remain level-headed in times of market volatility.

So while it’s tempting to buy a stock when you see it soaring, this lesson would tell you to resist that impulse and take the time to do some proper research. Similarly, when markets tank, it’s tempting to panic and sell, deviating from your strategy – and at what may be the worst possible time. When emotions take over, it’s easy to forget that you’re generally much better off investing and staying invested over the long run with a well-diversified portfolio that’ll reap the benefits of compounded interest, which Albert Einstein famously called the eighth wonder of the world.

2. Diversify.

Just as poker players won't go all-in on every hand, investors shouldn't put all their money into a single stock or asset class. That’s because diversifying your portfolio can help manage and spread risk. By not putting all your eggs in one basket, you mitigate the potential adverse effect that a single stock’s poor performance can have on your portfolio. If one investment falters, after all, others might perform well, offsetting your losses. What’s more, individual asset classes move in their own ways, depending on the economic environment. So by combining multiple asset classes in a portfolio, you can better withstand changing economic conditions.

Diversification is actually related to another poker concept called “bankroll management”. Just as poker players must manage their chip stacks to ensure longevity in the game, investors must manage their capital. It's crucial not to allocate a disproportionate amount of your capital to a single, high-risk investment, as this can lead to significant losses, potentially devastating your portfolio. Consider this: to recover fully from an 80% loss, you’d need a 400% return.

3. Sit at the right table.

In poker, this is known as “game selection”, which basically means trying to find the most profitable tables to sit at. It’s similar to investing: it’s useful to find a niche where you can develop an edge and then mainly focus on those kinds of opportunities. Take Warren Buffett, for example: as a value investor, he’ll only sit at an “investment table” with lots of undervalued stocks. He zeroes in on value stocks, which is his forte, and he remains untempted by speculative growth stocks.

Other investors find their niches by focusing on particular sectors, investment approaches (e.g. technical analysis), special situations (e.g. spinoffs), and so on. If you don’t have a niche or you’re not good at stock selection altogether, that’s perfectly fine: that’s your cue to just stick to passive investing through index funds and/or ETFs.

4. Focus on the process (not the outcome).

In both poker and investing, outcomes – good or bad – don’t always reflect the quality of the decisions made. Sometimes bad decisions lead to good outcomes and good decisions lead to bad ones. You might go all-in on a weak poker hand and still rake in the pot, but this bold move won’t ensure success every time. Similarly, pouring all your savings into a speculative stock might yield a windfall (if you’re lucky), but neglecting principles like diversification is much more likely to be a road to ruin.

A useful approach to enhancing your decision-making is to envision repeating a particular action (i.e. a specific poker move or investment decision) 100 times: would it consistently yield positive results? While short-term outcomes tend to be unpredictable, maintaining a solid and consistent decision-making process ensures that, over time, you’ll have more favorable outcomes.

5. Distinguish between luck and skill.

In poker and investing, you have to be able to differentiate between luck and skill. Sure, both factors play a role in immediate outcomes, but luck on its own can lead you down the road toward an unreliable and unsustainable strategy. For instance, when you win a hand with a bluff or see a sudden spike in a speculative stock, that might feel rewarding, but if you attribute these successes purely to skill, you could end up overconfident and prone to miscalculations in future decisions. Recognizing the role of luck ensures that you remain grounded, analytical, and ready to adapt.

And, at the same time, developing and refining your skills – whether it’s in calculating poker pot odds or analyzing market trends – will offer you more consistent, long-term success. The best players and investors attribute their victories to skill, acknowledge the role of luck, and continuously seek to learn and improve, ensuring they don’t fall into the trap of mistaking a lucky streak for genuine expertise.

6. Be patient and wait for good opportunities.

In poker as in investing, you don’t have to play every hand: you’ve got the luxury of waiting until the odds are stacked in your favor. As Buffett once said, “the stock market is a device for transferring money from the impatient to the patient”. So let’s say you’ve set aside 20% of your portfolio to invest in single stocks that you have a lot of conviction in, but you can’t seem to find any good investment opportunities. In that case, instead of buying some stocks you’re not fully on board with, you’d be much better off sitting on the sidelines and holding that portion of your portfolio in cash. It’ll allow you to fully capitalize on the really big opportunities when they appear – and they will.

7. Read the room.

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 focus just on the cards or asset prices: look at what other players are doing. Good poker players know how to read a room and spot a bluff – and top investors have learned how to interpret market sentiment and realize when excessive optimism or pessimism is dominating price movements. To quote Buffett (who’s a great poker player, by the way): “be fearful when others are greedy, and greedy when others are fearful”.

8. Know when to fold ’em.

Kenny Rogers did seem to know a thing or two about the game. In poker, knowing when to fold is as crucial as knowing when to bet. It’s about knowing the value of strategic retreat, and acknowledging that not every hand can – or should – be played to the end. This principle is directly applicable to investing. Just as a poker player must recognize when a hand isn’t worth pursuing, investors must discern when an investment is no longer promising – and cut their losses accordingly. Holding onto a losing investment in the hopes that it will turn around can be as detrimental to your financial health as stubbornly playing a weak hand at the poker table. In both scenarios, the wisdom lies in knowing that sometimes the best move is to swallow your pride, cut your losses, and learn from your mistakes, rather than clinging to hope and potentially suffering greater setbacks.

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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.

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