Many people have the misconception that poker is a game based solely on luck. In fact, this could not be further from the truth.
As with most other games, luck does have a factor in the game, but a whole host of other factors will affect your decisions and ultimately your profitability in the game. These can include knowing probability, reading betting patterns and understanding player psychology, just to name a few.
Some of the skills you can learn from poker can also be applied to investing. In my eight years playing poker, I have learnt many important lessons along the way.
In this three-part series, I will look at nine investing lessons that can be learnt from this dynamic card game.
Lesson 1: Always adapt to changes
One of the most basic poker mistakes that new players will make is not adapting to new information. A good example is when we are holding the best starting hand in poker – Pocket Aces. We may decide from the start to bet big through out the hand and never fold. However, this is a big mistake as there are times when we need to reassess the situation if we realise the next few cards that we have been dealt with are unfavourable. Therefore, the better option would be to continually take in the new information and decide on the best decision to take as new information unfolds.
This is a lot like investing. We need to always adapt to changes. This can be in the form of selling a company whose fundamentals have changed or adopting a different investing approach as we near retirement. Adopting a plan while investing is important but we still need to continually find out if there are changes and adapt accordingly if needed.
Lesson 2: Never put all your eggs in one basket
Professional poker players always have enough cash left behind in case they run into bad luck. Because of the element of luck involved in the game, they will usually only put up a small percentage of their entire bankroll to play in a particular poker game, possibly in the region of just 1% of their bankroll.
As investors, this definitely applies to our portfolio management strategy as well. Any single investment can go sour due to a multitude of reasons, such as unfavourable business conditions, disruptive technologies, change of management, etc. We need to ensure that we diversify our portfolio sufficiently such that no single investment can overtly affect our returns.
Lesson 3: Do not make decisions on just a single piece of information
In a previous article, I wrote about three common cognitive biases that may lead to investment mistakes. One of which is anchoring or focusing on a single piece of information.
This applies to poker as well. If you play poker based solely on the strength of your cards, you are most likely going to end up losing. To be a winning poker player, you will instead need to use much more information to make your decisions. This can include how your opponents are reacting and observing betting patterns and tendencies.
As stock investors, we can also learn from this. We should not base our investment decisions based solely on a single piece of information but instead ensure we develop a comprehensive understanding of the company.
The Foolish bottom line
There are many lessons we can learn from playing the game of poker. By applying these same lessons to investing, we can also make better investment decisions in the future.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.