COMMENT
What Poker Teaches Us About Investing

Poker is reckoned to be one of the fairest casino games. That's because, unlike other games of chance, players are not competing against the house but against each other.

Instead, the house makes its profits from the 'rake', which is a small percentage of each pot. Since winners collect most of the pot, they don't begrudge paying most of the table rent. Furthermore, if you are playing poker at home with friends, the 'rake' goes towards paying for your drinks and pizzas!

As a keen poker fan, I was interested to see that PartyPoker, one of the biggest online poker websites, was considering floating on the stock market. It reminded me that there are some interesting parallels between good poker players and successful stock market investors. This is not to say that investing in shares is akin to gambling, but merely that the similarities are noteworthy.

1. The Importance Of Strategy

Good poker players have clear playing strategies. What's more, they stick to their strategies even if they are having a run of bad luck.

Successful stock pickers have clear investing strategies too. This helps them identify what shares to buy and which ones to sell. Like poker strategies, there are many investing strategies to choose from, and you have to find one that suits your personality and plays to your strengths (for example, you might be good at analysing accounts).

2. The Concept Of Sunk Costs

Most poker player knows they may occasionally play hands that they should have folded. However, they are also aware that money committed to a pot should not affect their decision-making. That's because a weak hand cannot be strengthened by throwing more money into the pot. Money that you have committed to a pot is a sunk cost, and this cost will be unaffected by any future decisions you make.

Experience investors understand the concept of sunk cost when buying shares. Consequently, they rarely look at whether a share is making a profit or loss. Instead they decide where the funds should be invested to generate the best returns.

3. Skill vs. Luck

Finally, poker players know that luck can play a part in any game. However, whilst the lucky amateur can beat professional poker players on any given day, skilful professionals tend to win over the long term.

Luck also plays a part when picking shares. But experience and knowledge win out in the end. Unfortunately, it can take a few years before you discover whether you're cut out to be a stock market investor. However, don't forget you can still make a handsome long-term return from shares by just opting for an index tracker instead.

More on index trackers | More on share buying