Investing Lessons I learned from Playing Poker

A few of my close friends and family know that at the height of the great recession, I played poker professionally for a small period of my life to make ends meet. I watched videos of cash games and read poker books during the week and went to Atlantic City on Saturday nights to play poker. For a little while, that is how I paid rent, my student loan and put food on the figurative table (I didn’t have money for a real table).

While I don’t play much poker any more, lessons I learned from that phase of my life still help me everyday when it comes to managing my investments. I want to share those here today.

  1. Money and Emotion are inseparable – Whether you are making a big bluff in a poker game or investing in Bitcoin, what happens with your money is going to have a deep emotional impact on you. It is why people develop tells in poker. They do not even realize that they are subconsciously dealing with the emotional twitch that betting money creates, via some sort of a physiological response. They don’t know it but the sharks at the table do. Same happens when you purchase investments. If you put your money in a CD (certificate of deposit), you know that money is safe and you will get it back with the prescribed interest in the prescribed amount of time. No emotion necessary. Its like having the royal flush. You know you can’t be beat. If you purchased Bitcoin however, you will watch that exchange rate like a hawk. Every large swing is going to make you extremely happy, or extremely worried. Next time you invest, think about how you want to feel about that money. Can you lose it all for a big payday? Can you afford to lose some of it if there is potential for some gain? Invest in a way that will allow you to sleep at night and not make you an emotional nut job.
  2. Do not put good money after bad – The concept of ‘Implied Odds’ in poker is something most good poker players understand well. It is not just a simple calculation of what is in the pot and the probability of you winning or losing it. It is the calculation of what would happen if you don’t get the card you need in the next turn and you have to contend with a big bet with your odds of winning now even lower? Are you going to continue paying to be in the game even though the math no longer makes sense and your potential losses are even bigger? If the answer is no, you may want to fold right now and cut your losses. Same goes with investing. No-one can swing a home run every pitch. You will make investments that will sometimes lose. How you respond to the emotion that comes with losing some money will determine the long term outcome of your investing strategy. Some times, it is better to accept that you made the wrong call, sell your stocks at a loss and take the tax write-off. At least Uncle Sam will partake in your losses.
  3. A lost opportunity is far better than a massive loss – When they realize that they folded a 5,7 that would have made them a straight on a big pot, some people suddenly start playing those types of hands hoping it will happen again. They forget that the probability of what just happened, happening again is pretty low and end up bleeding money until they get frustrated and start playing even worse, pretty soon finding themselves broke. Investing is the same way. The market today is so optimistic because people are simply worried about missing out. The media and internet glamorizes young millionaires that bet big on Tesla and Bitcoin and everyone jumps at the opportunity hoping they too can ride the wave. How many know what Tesla’s balance sheet looks like. Or how many cars Tesla delivered last quarter or how much debt they have? Its like going all in on a pair of 9s because someone just won a big hand with a pair of 9s. Look at the data. Do your research. Try to educate yourself. Then make the decision that is right for you. If you decide to fold 9s that would’ve won, at least you didn’t go bust.
  4. You don’t have to win every hand (honestly, you can’t) – In a full handed game with everyone with the same skills, the odds of you winning a pot are 1 in 9. So you know for a fact that for every 9 hands you play, you will lose 8. How then, do you manage to win. The way to do it is to win big when you win and lose small when you lose. Over time, the incremental gains will result in a big upside. In investing, this is achieved via diversification. Do not ever bet all your money on one investment. You identify a large number of potential winning investments after exhaustive research and then inject funds into all of them. They all need not be winners but if you are right on a few of them and not terribly wrong on the others, you will come out well on top. Its not going to be a quick journey up or down but a winning session at poker is also usually several hours.
  5. Patience is a virtue and knowledge is power – Every hand you play (whether you win or lose) is data. Data that plugs into your big data repository and data that you can draw on in the future to make decisions. Just because you are not playing a hand does not mean you stop paying attention. Continue doing the math. Keep assigning cards to people to the best of your ability to see if you are right when they show. If you were right, you’ll be more confident when you play against that person in the next hand. Investing is the same way. Just because you don’t own a particular investment, don’t refrain from learning about it. Read the news. Read books. The entire global economy is connected. You think you’d benefit from knowing how? Of course. Figure it out and play it to your advantage. When an analyst says buy a particular stock, think about why? Did the company strike a new lucrative deal or did the Wall St. analyst recommend their clients to buy the stock 3 weeks ago and now wants the rest of the world to drive up the price? Be patient and learn before you invest. The market opens every day. There are new opportunities to invest every day. The dealer will always deal another hand.

For all of these reasons, I’ve always argued against calling poker gambling. While the luck factor exists in poker, human factors are indispensable. There is a reason a lot of the same people consistently win poker tournaments and cash games. They’re not lucky. They’re just virtuous. There isn’t a world championship of coin flipping. Now that would be the contest for the luckiest few.

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