Playing your cards well is essential in both investing and poker. It should thus come as no great surprise that some of the greatest investors of all time are also skilled at the game of poker. According to scholarly research, successful poker players often make successful hedge fund managers. Therefore, I spent some time at a green-felt table, and here are eight things I learned about investing that you can use from the world of poker.
Emotional swings are common in both poker and investing, but you should never let them influence your judgments. When it comes to poker and investing, emotional control is perhaps just as crucial as cold calculation. You will be less likely to "tilt," as it is known in the poker world, and more likely to adhere to your plans (that is, making irrational decisions). Consider that the finest poker players always employ the same strategy, regardless of the outcome of the previous hand. Similarly, being able to keep your emotions in check can help you keep your cool when the market is shaky.
So, although it may be tempting to buy a company when it is surging, this lesson would advise against doing so before conducting thorough research. Similarly, when markets drop, it might be tempting to sell in a panic, even if doing so may be your worst option. Investing and maintaining a varied portfolio over the long term is typically much better because of compound interest, which Albert Einstein famously termed the eighth wonder of the universe. However, it is easy to forget this when your emotions take control.
Investors should not put all their money into a single company or asset class, just as poker players will not always go all-in. That is because reducing exposure to risk is one of the main benefits of diversifying your investments. Do not let the bad performance of a single stock devastate your portfolio by placing all your eggs in that basket. After all, even if one investment fails, your portfolio may do well, allowing you to break even. Furthermore, different asset classes behave differently in different economic climates. As a result, diversifying your portfolio across different types of assets might help you weather volatile markets.
Bankroll management, which is closely connected to diversification, is another important strategy in poker. Investors need to handle their money the same way poker players need to manage their chips to stay in the game for as long as possible. Putting too much of your portfolio's resources into a single high-risk investment might wipe out your savings and ruin your financial future. If you lose 80% of your investment, you would need a return of 400% to break even.
What we mean when we say "game selection" in the context of poker is looking for the most lucrative tables to play at. According to casino news reports, it is like the stock market in that you want to locate a certain area where you have an advantage so that you may devote most of your time and energy there. For example, Warren Buffett, who is known for his value investing strategies, prefers to attend "investment tables" where there are many cheap stocks. Since value equities are his specialty, he focuses on them and avoids riskier, more volatile growth stocks.