Poker is a game of luck, skill and daring. Because these three factors are similar to what investors experience in the stock market, we can apply many similar concepts in poker to investing.
In light of this, I have decided to write a three-part series on the nine investing lessons I have learned from playing poker. This is the second part of the series. The first can be found here.
Lesson 4: To win in poker and investing, we need to put our pride aside
Warren Buffett once said, “’If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”
Winning poker players go out of their way to find soft tables to play at. This strategy may seem incorrigible or unethical, but it really does increase the win rate of many of the best poker players in the world.
As with poker, we need to put our ego aside and be aware of what we do and do not know. Investors should only invest in what we are familiar with. By focusing on our strengths and not going beyond what we understand (or our circle of competence), we will be more likely to find great long-term winners in the stock market.
Lesson 5: Murphy’s Law applies
If you were a regular poker player, you would be familiar with the phrase “bad beat”. It is a situation a poker player might find himself after putting all his chips in the middle with the better hand. Unfortunately, the subsequent run out of cards causes the player to lose the hand eventually.
This occurs numerous times while playing poker. Even if you start the hand with an 80% chance of winning, there is still a 20% chance that you may end up on the losing end. To overcome this variance in luck, poker players need to ensure they play a significant volume of hands so that the luck evens out over a period of time.
Investing is much like this. Murphy’s Law states that any possible outcome will occur given an infinite number of occurrences. We are bound to have bad investments over time. However, if we diversify our investment portfolio, and invest with the correct investment strategies, we are more than likely to achieve positive returns in the long term.
Lesson 6: Control your emotions
One of the biggest frustrations while playing poker is losing over and over again in a single night. This can cause a player to go on what poker players call “tilt”. A player who is “on tilt” usually makes very poor poker decisions as his emotions have taken control of his actions.
Investing in the stock market requires us to have good control of our emotions. Sudden unexplainable movements in share price should not affect our investment decisions. We should also not let fear or greed cloud our judgment. Some investors who are unable to control their emotions effectively may end up making rash decisions trying to chase back losses, which might worsen the situation.
The Foolish bottom line
Unlike popular belief, poker is not a game based only on luck. It requires a good understanding of numbers, probability, and psychology. All of these skills and concepts can be applied to our everyday life and investing strategy. Hopefully, these investing lessons can help us as investors make better financial 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.