People may consider Poker to be a game of luck & gambling. But this is quite far from the real truth. Luck may play a part but rules, principles, odds and proper money management are the largest components of Poker, as well as investing.
A little introduction about poker would be helpful here.
Poker is a game of decisions based on having a sampling of the general information. It is all about having an ability to cut losses in risky situations by calculating odds, using a skilled memory and taking quick decisions under pressure. (Wikipedia offers all basic information about Poker and its variants).
Now the similarities between Poker and Stock markets are –
You can start small. But if you are sure, be ready to take bigger bets
Most poker players enter the game at ease. They place small bets until they have a fair idea about playing styles of other players & their own ‘luck’. Stock markets also allow one to start small. It helps in knowing whether one’s investment philosophy is profitable or not and whether same can be replicated with bigger bets or not. Poker allows one to raise bets if one is confident. Stock markets also allow one to increase their bets depending on confidence or overconfidence.
Controllable Vs Uncontrollable
Just like in Poker, there are only two factors in stock markets– Controllable and Uncontrollable. One must respect the fact that there are bound to be things that cannot be controlled. For example, in Poker one can neither control other player’s emotions nor the cards being dealt. Similarly in investing, one cannot control the overall markets or various events taking place which have an effect on stocks. But that does not mean that one should leave investments at market’s mercy. It means is that one needs to have a greater awareness about his environment.
In poker, a player knows that there are times when luck may not favor him. However, instead of playing blindly, he focuses on what can be controlled: his own reactions. For investors, it means knowing what is going on in the world and knowing how these things could affect one’s investments. So when a political, economic or social event occurs, you know how to react to save your investments.
Knowing when to Fold
In poker, the players who stay in the game the longest (& reap the biggest rewards) are those who know when to fold. One should understand that, not every bet may be favorable. It is better to cut losses and wait for a better opportunity. Same is the case with investments. Not every investment is going to have a high return. Some may fail. To avoid losing more money than usual, one should learn when to pull out of an investment.
There will be another opportunity
In both the games, there will always be another opportunity. So its better to wait for it to take a bigger bet. Its saner to live today and fight (play) tomorrow.
All-In can be the last decision you make
You put all your eggs in one basket and you risk losing everything. In investments too, a focused diversification is more advisable than single point focus.
Human Psychology
Poker requires skill in reading one’s opponents. A player must understand when other player has a really good hand or is merely bluffing. Otherwise he will always end up losing money. One must also be sensitive about how others perceive him. This in turn can be used to one’s advantage. Markets also bluff when some stocks go up in prices because of speculation or manipulations. Knowing the true value of a stock is based on knowing how humans think and rationalize.
Evening out the odds
Both poker and stock markets require a proper strategy, which is in synch with a player’s real self. Luck can only do so much in the way a game turns out. A poker player must know how to read the odds. He must know when to raise the bets and when to call a bluff. He must know which cards to keep and when to fold. Likewise, an investor has to know when to cut his losses and wait for another opportunity to score big. It in essence requires a long-term strategy based on solid facts rather than emotions. A stock market investor must always ask the question – What are the odds that a stock is going to rise? More importantly, one must ask the question -What are the odds that this stock would go down? And by how much? What is the worst case scenario?
In long-term poker play & long term stock market investing, somebody who has no strategy is as good as broke and one who merely goes with the flow is as good as busted.
Successful investors like Warren Buffett are regular Poker players. Just like in his investing, he is known to focus on players rather than the cards. He once remarked that –
If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.
All in all, the number one goal in poker as well as stock market investing is to preserve capital (return of capital is more important than return on capital). At the same time, the player must be willing to place big bets when the odds are favorable.