5 Investment Tips From Playing Poker
The top things I learned from being married to a professional poker player
|Written by Tom Yeung, CFA | CDFA|
Investment Advisor & Fund Manager, Jurnex Financial Advisors
At first, investing and poker may seem like two very different ways to make money. With investing, you’re playing against a mostly faceless market. But with poker, you’re playing against real-life opponents right in front of you where every bluff or raise can determine the outcome of the game. How can we gather any investment tips from playing poker?
But having been married to a professional poker player for eight years, I’ve come to realize there are some incredible similarities between the two. Those who lack understanding of emotional control, probability analysis, and wagering principles certainly have a long road ahead.
In fact, when it came time to learn how to play poker for myself, it turned out that investing skills worked. Common investing principles worked terrifyingly well against real-life poker opponents!
What does poker have to do with investing?
Before we look at the five top investment tips from playing poker, we should take a look to understand how poker and investing are even related.
As a side-note, I’m referring to the most commonly played version by the World Series of Poker: Texas hold ’em. This is a game where you’re playing against opponents, where both luck and skill are involved. Other versions of poker share similarities with investing and Texas hold ’em, but the principles are pretty similar.
- Wagering money. Both investing and poker involve making bets in uncertain situations. You might have a sense of things, but you’re rarely 100% sure about the outcome. (In poker, it’s surprisingly rare to get dealt the absolute top outcome on the flop)
- Probability and statistics. The role of chance plays an enormous part in the game. While new stock investors and amateur poker players alike might play “by feel”, experienced gamblers know their probabilities. Poker players would have a pretty good idea of the probability of drawing an inside straight, just as an experienced investor would know the probability of a company going bankrupt.
- Emotions. It’s essential to control your feelings to master either game. Once you start losing money in either poker or investing, it can be hard to make the right decisions going forward.
My Top 5 Investment Tips From Playing Poker
The best investors often do well in games like Bridge (Warren Buffett) and Texas hold ’em (David Einhorn). Yet the similarities shouldn’t be overstated, of course. It’s certainly possible to be a great poker player and a lousy stock picker, and vice-versa. But still, I’ve found these lessons to be absolutely invaluable in mastering games that require both skill and probabilities.
So with that, let me share my five top investment tips from playing poker.
1. It’s not hard to be above average
There’s a big misconception that you need to be a genius to do well in investing or poker.
That’s because whenever we see professional poker players or investors on TV, they are at the absolute top of their class. We associate success with requiring flawless performance.
The average player is… rather average
The first time I stepped onto a casino floor to play poker, I was nervous. My other half had told me to watch for sharks in the water: professional players who would take everything you brought. Yet that worry disappeared fast.
It turned out that the average poker player was actually… well, rather average. The fear I had of meeting an experienced world-class poker player just didn’t happen. Instead, these were people from all walks of life. Some had a lot of experience, but the most were pretty casual players. It didn’t take much to realize that, to start, I was pretty average too.
You don’t need to be #1 to win
It’s easy to think you have to win the World Series of Poker to “make it”. That can’t be further from the truth. Spending a couple of hours in a poker room or small tournament can still easily net you thousands of dollars. And that’s good enough for most of us. The same goes with investing: beating the market by even 1-2% per year can mean the difference of hundreds of thousands of dollars in the future.
- At 7% growth: After 40 years, $10,000 turns into $149,745
- At 9% growth: After 40 years, $10,000 turns into $314,094
It’s not hard to be above average.
For me, it didn’t take much to become slightly better than the average poker player. When I first started taking poker lessons from my spouse, I might not beat the best players, but it was good enough to consistently earn decent winnings each time. And it’s gotten even better with practice.
Burton Malkiel, author of A Random Walk Down Wall Street once quipped how a monkey throwing darts at the stocks section of the newspaper could do just as well as the market. But imagine seeing a newspaper with 100 random darts thrown into it, and you were allowed to take ONE dart off the wall before the investments were made. If you could identify just ONE of the 50 below-average darts, you would have done better than the market.
You don’t have to be the best in the world. In fact, you only need to do slightly better than average, and you’ll still do well.
2. Rules will help you succeed
So how did I become a better than average poker player so quickly? The first lesson I learned is a poker player was maddingly straightforward:
You can get ahead by following simple rules.
Unknown to most outsiders, the majority of poker profits are made pre-flop. For all the TV air-time that’s dedicated to post-flop betting (the betting that takes place after communal cards are shown), the stage is actually set before you see a single communal card. That’s because the most important cards for you are actually the two in your hand.
But how do you know how to play those two cards? It turns out the answer is very simple: memorize the rules.
In poker, there are specific actions you can take to maximize your chances of winning. This is based on
- The cards in your hand
- Your betting position on the table
- Bet/fold actions of others.
Because of the number of combinations possible, there’s a lot of memorization involved. But once you have those rules memorized, you can get pretty close to game-theory-optimal (GTO) playing. It’s still not a guaranteed win, but it’s frighteningly effective in all but the most professional competitions.
Fold bad hands
Interestingly, these poker rules force you to fold a lot of hands. There would be hours where I’d barely play at all because the rules would guide me that way. These were hands that looked pretty good too: Jack-10 off-suit or 7-8 suited. But as I gained more experience, I started to realize that even if you could win with those hands, it happened far less often than you would expect.
Bet big on good hands
Another interesting aspect to game-theory-based betting was how aggressive you’d bet when you DID have good cards (and how aggressively you would bluff with straight-draws). These betting rules have gotten me to push others all in before seeing a single communal card.
Stock investing operates by similar rules
Astonishingly, stock investing follows virtually the same principles. There’s a saying in trading that “well bought is half sold.” Instead of worrying how much profit you’ll eventually make, if you buy the right stock for cheap enough, that question will eventually answer itself.
And that means passing on a lot of stocks that seem decent but aren’t all that good. You might spend weeks, months, or even years waiting on the right investments to come around. But when they do, you should be ready to invest a lot.
3. Learn to control your emotions
The third of the top investment tips from playing poker involves emotional control.
In poker, losing your cool is known as “tilt”. The most common cause of tilt is from losing money, and even professional poker players occasionally succumb to their baser instincts when they’re defeated. We’re only human.
Tilting leads to overly aggressive playing
Frustrated poker players tend to become much more aggressive in their play style. Where a calm player might fold a hand, a player on tilt might try bluffing his or her way to a win, no matter the cost.
Unfortunately, that cost is usually quite high. Experienced poker players can tell when less experienced ones are betting junk hands aggressively. Even amateur players can often tell when someone is running off the rails. That’s why when you find yourself tilting, it’s best to step away from the table and take a break if you find you can’t control your emotions.
Investing can also be an emotional rollercoaster
It’s no surprise that investing can feel like a roller coaster too, with all the daily ups and downs. Seeing losses take out a chunk of hard-earned savings tends to cause people to trade much more aggressively. In investing, this can mean either selling losers as they’re ready to rebound, or buying shares in mediocre or high-risk companies.
Reset your emotions
One similarity I found between poker and investing is this: every game is a new game. Your money stack has no memory of whether it was larger or smaller than before. So even if you made 10 failing wagers in a row, your (smaller) stack of cash doesn’t actually care any more than if you made 10 winning wagers in a row. That 11th wager remains the same.
That’s why it’s so important not to let profits go to your head, or losses turn into aggression.
4. A bad outcome ≠ bad decision
It’s well-known that stock investing and poker playing are games of skill and probabilities. You need to know your probabilities to do well in both games.
What’s less well-known is how to deal with probabilities ex-post, i.e. does a bad outcome mean it was a bad decision?
What if you went all-in with pocket aces and still lost?
Imagine you were playing against 4 people and were dealt two aces. You immediately have a 64% chance of having the best hand. Those are pretty good odds, and so you might take the bet when someone pushes all-in pre-flop.
At this point, both of you flip your cards over, and it turns out the other person only has 4-7 off-suit. He was just bluffing to pick up the blinds! At this point, you have an 84.5% chance of winning.
But now imagine that a 5-6-8 comes down in the flop… he’s got his straight and you’ve lost. Were you wrong to go all-in with A-A? Not at all!
In fact, if you made that bet over and over again, you’d do pretty well over the course of your poker career. It would be foolish to never go all-in with pocket aces again because of that one unlucky outcome.
Stocks can take years to bear fruit
Even the best investments can have bad outcomes. A great CEO make it run over by a bus, or a great industry might unexpectedly decline.
And even if you’re doing everything right, short-term moves in the stock market can make it hard to see any underlying improvement. Cheap companies can get cheaper for years before seeing their prospects improve. It takes patience and conviction to see through any long-term investment.
5. Learn to have fun
To make money in stock market investing or playing poker, you need to have fun! And that’s because you need the patience to play for the long-run.
The most successful players and investors I’ve ever met were those who patiently stuck with it. They were the ones who overcame initial losses and stayed dedicated to becoming master players. These masters still slip up on occasion. I’ve seen my own partner tilt at the poker table so badly that we had to cash out and leave the casino to stop him playing for the night.
Yet, the best players will always recover their composure because they find the game enjoyable.
What if you don’t enjoy playing poker or investing?
If you find yourself disinterested in playing poker or investing? Find a different hobby!
But how do you then invest your savings?
Fortunately, there’s another option for savers out there. Rather than worry about investing yourself, you can invest passively, or invest with the help of a financial advisor. Life’s too short to do things we don’t enjoy. And if finance or poker is on that list, then there’s no harm in passing the torch to someone else to carry for you.
Want more help investing?
If this seems like a lot of information, don’t worry. The great news is you don’t have to do it alone. There are plenty of investment pros who can help you become an even better investor. In fact, all it takes is a phone call to get in touch with a pro investment advisor today.
Where to find more resources
If you’re looking for even more investment tips, you’ve come to the right place.
That’s because I’ve helped invest client money for over a decade in the same old-fashioned way: seek out great companies in great industries that can be purchased at a discount to their fair value. Sounds too simple to be true? Give me a call today and I’ll show you that it’s still possible after all these years.
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