This may be surprising for some, but there are great investors around who are in fact, avid players of the card game Poker. Hedge fund manager David Einhorn, whose firm Greenlight Capital manages roughly US$8 billion, is a great example – he’s an active, semi-professional poker player. The reason why great investors may enjoy poker is because there are actually a good number of similarities between investing and poker. Here are five of them. Luck and Skill Good poker players understand that poker is a game that involves both luck and skill. It’s the same with good investors and investing….
This may be surprising for some, but there are great investors around who are in fact, avid players of the card game Poker. Hedge fund manager David Einhorn, whose firm Greenlight Capital manages roughly US$8 billion, is a great example – he’s an active, semi-professional poker player.
The reason why great investors may enjoy poker is because there are actually a good number of similarities between investing and poker. Here are five of them.
Luck and Skill
Good poker players understand that poker is a game that involves both luck and skill. It’s the same with good investors and investing.
No matter how talented or great you are at the game, it’s impossible for you to be right all the time. People who think that they have a 100% hit rate with every investing/poker decision they make will eventually (sometimes quickly) learn a hard lesson.
We should always keep in mind the important fact that there is an element of luck that can influence our investing results and we have to stay humble, no matter how good we think we are.
Having a system that works over the long-term
Because investing and poker both involve an element of luck and skill, he who knows his odds, wins.
A big part of investing and poker is about creating a system that will work for you over a long period of time. To create a system, we have to understand the odds.
That is why some of the best investors like Warren Buffett, Philip Fisher and Peter Lynch like to invest in high quality companies. Great companies tend to perform better over the long term compared to weaker companies – the odds of success are thus on the investor’s side with a quality company.
That is also why we have to demand a high margin of safety before investing in a company. A high margin of safety tilts the odds in our favour by minimizing our downside risks.
So long as we have a solid system in place – that is, our investments are made based on logical reasoning and a careful appraisal of a business and not on trying to speculate – we should be able to beat the game of investing over the long-term.
Having enough chips for the game
In poker, it’s vital that you have enough chips (chips are used to represent actual cash in poker) to let you stay in the game.
It’s the same with investing and that is why having a strong personal balance sheet and investing within our means are so important.
If we invest outside our means by invoking the use of excessive leverage, it’s possible we might experience the pain associated with John Maynard Keynes’ famous maxim about the financial world: “The market can stay irrational longer than you can stay solvent.”
You don’t have to play every hand
One mistake most amateur investors and poker players make is that they play too many hands. In other words, they force themselves into the thick of the action on occasions when they really should be staying on the sidelines.
We have to understand that even though the stock market is in action nearly every weekday in every second from 9am to 5pm, we don’t have to be making an investing decision all the time.
An interesting commonality amongst the best poker players are that play only very few of their hands, sometimes even less than 10% of the hands they’re dealt with. The reason for that is because they want to play only in situations where they think the odds of winning a hand are in their favour.
This is similar amongst investing greats. Buffett has famously said that investors should imagine themselves as having an investing-idea-ticket that only has 20 punch slots available. Each time an investing decision is made, a punch would be made; there’d be no “refills” once the 20 punch slots are used up.
Buffett’s admonition isn’t meant to suggest that investors can only literally make 20 investing decisions in their lives. What he’s suggesting is that, we should not be making decisions all the time and in haste. We should be seriously thinking about each investment before jumping into it.
Understanding human behaviour
Lastly, in both poker and investing, we are dealing with other people. Therefore, it is very important for us to be able to understand the emotions or psychology of the group you’re playing with.
In poker, there are two terms to describe how a player plays: “tight” and “loose”. A “tight” player is one who is very risk-averse; he or she will only play when dealt good hands and is very protective of his or her chips. A “loose” player on the other hand, is one who tends to play more hands and is often trying to bluff his or her opponents.
It is generally advisable for a poker player to be “tight” when the table is filled with “loose” players and be “loose” when the table is “tight.” The reasoning is simple: If the table is “loose,” you will have a lower chance of bluffing your opponents and it will thus be wiser to just play good hands as you would then have a better chance of beating them with your own legitimate set of cards.
This is very similar to investing in the stock market. I’d like to bring up another Buffett quote again which sums this up: “Be fearful when others are greedy and greedy when others are fearful.”
It is interesting to see a game of cards having so many things in common with investing. In fact, if you look at the common things we do on a daily basis, you may realize that there are many things in life which can give you great lessons about investing.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.