Investment Advice for Poker Players

Lately, I've taken a more active interest in my investments. I've grown tired of watching my money slip away in this bear market, all the while paying nameless, faceless fund managers to let it happen. So, instead of just putting money aside every month and hoping for the best, I am doing a lot of reading up on investing and learning a lot about a world that I'll need to understand if I want to have anything left to retire on.

One of the things I've learned is that trading stocks, bonds, options, and other securities is a lot like playing poker. Instinctively, I always knew that Wall Street had a lot in common with my local casino, but recently it has really hit home. Here are a couple of lessons I learned from my study of finance that apply to card players as well.

Limit Your Losses, and Let Your Winners Run. Surely, you've heard this advice by now, as it has been spread pretty thickly over the years. The idea is that if you're in a game losing, it is better to quit too early than too late. Even if it's a game that you think you can beat, even if you've beaten it before, you're better off calling it an early night than to drop hundreds or thousands more in an effort to get back to even.

But what the investment world has taught me is that this advice is completely counterintuitive, and rarely followed, even by professionals. We all want to be winning investors/poker players. And how do we measure our success or failure over time? Logic would dictate that we measure it based on how much money we won or lost, but too often we measure it by how often we win or lose, not how much. We think winners win most of the time, while losers lose most of the time. So what do we do? When we are down, we try like mad to get back to even, so that we don't have to call the night a loser. When we are up, we want to make sure that we leave with a profit, so we quit too early, or play tighter than a hen's bottom. We are scared to death of turning a winning session into a losing one, so we leave the table too soon in order to preserve our winnings.

The fact is there are a lot of very rich traders who make lots more losing trades than winning trades. And there are a lot of poker players out there, especially in tournaments, who lose more often than they win. But when they are winning, they try like mad to make the most out of a session. And when they are losing, they are more than willing to call it a night.

Do Everything for a Reason. In the investment world, traders make moves for lots of different reasons. Sometimes, they've researched a situation and are willing to take a stand against the market. Sometimes, they just want to reduce their risk on another position. But each and every trade they make is for a reason, even if it is one that comes from their gut. Good poker players are the same way. If you call a bet, ask yourself, "Why did I call? Why didn't I raise or fold?" If you run a bluff, ask yourself, "What about this hand made it a good one to bluff on?" Give some thought to your own actions, and be willing to criticize yourself if your actions don't have adequate basis.

I'm not saying to second-guess yourself. I'm not saying that you have to play perfect ABC poker to win. But too often, even good players make moves that they just hadn't given any thought to, and they usually regret them.

It's Harder to Know When to Exit Than When to Enter. There are lots of investment books, websites, systems, even TV shows that will tell you when to get into a stock. But there are very few that will tell you when to get out. When you're considering a stock, you're on the sideline. But the moment you've bought a stock, you're married to it in a way. You are much more sensitive to its ups and downs, and the stock becomes a reflection of how smart you are. So it's very difficult to know when to sell the stock, take the cash, and to sit back on the sideline.

The same is true in a poker game. When you are in a hand, especially once you've put a lot of money into it, the tendency is to stick with it even when you shouldn't. You know that if you fold, you have a 0% chance of winning the hand, and everyone at the table will know that you can be made to back down. But sometimes folding is exactly the right thing to do. Those that can fold their hands and live to see another day will be in the game a lot longer, and will have more chances to win in the long run.

Volatility is Your Friend. In poker, it's called variance. In finance, it is called volatility. It is the swings in the market that make the game interesting. On Wall Street, there are a surprisingly large number of guys who only deal in safe, secured financial instruments. These are the treasury notes, the AAA-rated bonds, the well-diversified Blue Chip funds. (Actually, even the Blue Chips are often too bold for these guys.) And they will rarely lose money. But they won't make much either.

The real money is made by the hedge fund managers who take calculated risks on positions with huge payoffs. These guys aren't afraid to be wrong, but even when they are, they know exactly how much they stand to lose. This is the aspect of trading that reminds me of poker. At the poker table, there are guys who never put in a raise without the nuts, never bet unless their hand is made, never get out of line. Their primary objective is not to lose. And then there are guys who go after every pot they see, knowing that money not won is the same as money lost.

I'm not saying that the latter is how you should play, but have you noticed that as poker evolves and the level of play rises, tables are becoming more aggressive? Have you noticed that players talk about how much they can win in a particular hand as often as they talk about how much they can lose? Some players avoid tough decisions, avoid escalating the size of the pot. What they are doing is limiting risk, and there's nothing wrong with that. But risk isn't your enemy, so long as you have it under control. In fact, risk can be your friend.

Money Management Keeps You in the Game. One thing you never want to risk is your bankroll. No matter how soft the game is, no matter how well you've been playing, you can always lose. If a loss wipes out a large amount of your bankroll, then you've got to spend weeks or months building it back. It only takes a small piece, one that your stomach can handle, then you're back the next day ready to win.

Money management is a boring topic in the investment world, just like it is in the poker world. But it is important, and the world is full of people that were once in the market until they had a catastrophic loss. Bad beat stories exist on Wall Street just like on the Vegas Strip, and while people will sometimes listen sympathetically, they've heard it all before.

Zen and the Art of Winning. Poker books tell you to "separate your decisions from your results." Investment manuals urge you that "losses are part of any trading strategy. Don't identify with your wins and losses, identify with your strategy." Sure, you can learn from your lousy sessions, but don't become obsessed with them. And don't think you are God's gift to poker just because you've won a tournament.

One of the principles of Zen Buddhism is detachment. Zen Buddhists control their emotions, desires, and behaviors by seeing themselves as detached from the things that their minds put in front of them, like the characters in a movie are detached from the audience. You have to be that way with both trading and with poker. You sit down, pay attention to what is going on around you, make the best decisions with the cards you are dealt, and move on. You may be rewarded with good results or punished with bad ones, but neither changes the person that you are, and neither should effect how you play the next time you sit down.

There really are bad beats in investments, where you are 100% right about a position, and it still goes against you. But if you let a situation like this crush you either financially or emotionally, then you won't be at your best when the next opportunity comes.

If you are interested in learning more about the subject of investments, I would recommend the following books: Trading for a Living by Alexander Elder and The Psychology of Trading by Dr. Van K. Tharp. You'll be surprised at the similarities with the poker world too.

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