It’s quite the cliche to say it, but investing really is a lot like that good ol’ card game of poker, especially at the professional level. There are so many parallels between the two that it’s no wonder lifelong poker players make exceptional investors, and vice versa.
In 2018, multiple World Series of Poker Champion Vanessa Selbst took a post at Bridgewater Associates, arguably the largest hedge fund in the world and noticed the similarities straight away.
In a Facebook post where she announced this latest career move (Selbst previously worked at McKinsey & Company), she explained that working at this prestigious firm “feels a lot like poker did back in the day – a bunch of nerdy kids collaborating to try to beat our opponents”.
With a reputation for tenacity and aggression at the poker tables and a law degree from Yale University under her belt, would Selbst have gotten so far up the career ladder in the stock market without experience in poker? In all likelihood yes, since the same attributes that make for a successful poker player also make for a successful hedge fund manager. But did that time spent at the card table perfecting her craft accelerate her career? Absolutely.
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There may be differences between the two, but the world of poker and investing have a lot in common – and not just at the top tier levels. Playing poker can teach investors of any level a thing or two about their craft, even those who are just dipping their toes into the field.
Let’s take a look!
Experienced poker players know that no matter how tempting the opportunity may be, the risks involved from going all-in at the start of a game are just too great. Even a player who is dealt the cards to make up a supposedly “unbeatable” movement like a Royal Flush understands that winning a game comes from actually playing it, but going all in at the start is a mistake novice players frequently make. Whilst it could see them winning that first time, it doesn’t mean they’ll continue that streak for the rest of their career, or even understand how to actually play the game.
Sure, there are those occasions where you go all in on your first few big trades and they pay off, but even if you walk away with chance on your side then, it may not be there the next time. Investing, like poker, takes time and practice. You have to be patient and play the game, learning what you can along the way so that you can transfer those skills to the next trade, and the next, and the next.
Risk is all part of the game
Taking foolish risks like rushing an opportunity are a big no-no in investing, but as every poker player knows calculated risk is all part of the game. Just look at those world champion poker players like Vanessa Selbst, Phil Ivey and Bryn Kenney; they’ve all taken some serious risks throughout their career, but they’ve done so with a clear head and calculated decision making. The same can be said for investors at the top of their game; they make the decision to take a risk and don’t let emotion get in the way if, or rather when, it doesn’t work out.
Inexperienced poker players and investors aren’t able to separate the decisions they make from the results, but in truth they are two seperate things. If you’ve decided to take a risk and it doesn’t work out the way you expected, you need to be impartial about your process and figure out what didn’t work, or worked in the case of positive outcomes. Don’t react emotionally and most importantly, leave that bad trade in the past. Learn the lessons, tighten your strategy, but don’t get caught up in a loss mentality.
Understand when to hold and when to fold
As Kenny Rogers once said, “you’ve got to know when to hold ‘em, know when to fold ‘em”; in essence, it’s risk management and it’s at the core of a successful career in investing and poker. The best players in the world develop their risk management analysis to the point where they can trust themselves to make the decision to fold or “hold” at various stages throughout a game. It’s not just about knowing when to make a wager, it’s also about knowing those times when you need to walk away.
Applied to investing, an effective risk management strategy would analyse fluctuations, deciphering which pattern changes are par for the course and which are completely random. Even if an investment starts to break down, it’s sometimes necessary to hedge the risk but if random fluctuations happen that could change your reasons for investing, it might just be time to “fold ‘em”.