Poker may offer investors a few lessons.
We play games because they can teach us things about real life. For example, by playing Monopoly you can learn a bit about property investment, even if it is impossible, in real life, to own the whole of Mayfair, Park Lane or Regent Street.
However, it's games of chance that have most fascinated investors. For example Ed Thorp, who heads a successful hedge fund, Princeton-Newport Partners, started as a mathematician and was a professor at MIT. He was also the first person to make money from Blackjack using a card-counting system.
These days, it's poker and in particular online poker, that is often compared to investing. Books like Liar's Poker or The Poker Face of Wall Street have encouraged the comparison.
Here are the few simple lessons from poker that I think we can apply to investing.
1) Be selective
In poker you have to throw away around 80% of all hands you are dealt. Similarly, you should dismiss a large majority of possible share investments, concentrating only on those which give you the best chance of making money.
2) Be Disciplined
Poker players try to play every hand correctly. In many cases the player will lose money anyway. It is important that the player continue to play correctly, no matter how many times money is lost. Similarly, with shares, once a stock is exhibiting attractive characteristics, hold it until a selling point is reached no matter how the share price may gyrate in the mean time.
3) Control your emotions
Poker players call someone who has become too emotional as being "on tilt". Experienced players know when they are "tilting" and will stop playing for a while. Similarly, in investing you should not let wild variations in a share price, or a few disasters affect your ability to make good decisions. Take time-out to regain perspective.
4) Understand how each opportunity has a different value
In poker, hands have different values. If you are dealt high-value hands, you want to put as much money into the pot as possible. With a low value hand, you only want to keep putting money into the pot if you have a chance of a very large return. Similarly, with shares, large amounts of money can be put into good quality shares where the chance of bankruptcy is small. Lower quality "punts" may make a lot of money, but also have a high risk of going bust. With these, you don't bet the farm.
5) Walk away when it's going against you
In poker, sometimes you may start with the best hand, but then it goes wrong. No matter how much you liked the hand, you should throw it away when you are going to lose. Similarly, avoid companies once their businesses are in trouble. Ironically, this may now apply to companies that run online poker such as Partygaming
(LSE: PRTY)
and 888
(LSE: 888)
. These companies face mounting regulatory problems following legislation that the US congress passed in the last few days.
With the huge popularity of poker, people may be encouraged to think it is a good way to make money. Sometimes they dream of becoming professional poker players. That dream should remain a dream, in my opinion.
Once on a film set Ed Thorp was, allegedly, asked by Paul Newman, an actor, how much money he could make by playing black jack. "$300,000 a year," replied Thorp. Newman then asked why Thorp didn't just do that for a living. Because, replied, Thorp, he could make more money, in better working conditions, with nicer people doing something else.
I'd rather run a hedge fund too.
More:What Poker Teaches Us About Investing
