Investing can be a challenging and precarious endeavor.
There are a host of common mistakes investors make, and they almost always have serious consequences. Even the most stable investment can go wrong, and often forces outside your control affect your ability to make sound decisions. Consider those who had investments in Russia before the war broke out in Europe—they couldn’t foresee the impact here in the US, but it is real.
Outside of those market forces, there are skills that investors must possess which don’t seem to come naturally to all; indeed, some skills are in direct contrast to each other. For instance, you must be able to act quickly and decisively but also be restrained and assemble facts before investing. You must understand the complexities of the market, but sometimes you may need to go with your gut feeling. You must invest big for significant returns, but also take care never to overreach.
Where can one learn the skills required for such a complicated project? Oddly, the poker world can teach us many lessons, and good poker players have gone on to be good investors and vice versa. Vanessa Selbst, one of the most prominent poker players in the world, joined the world’s largest hedge fund, Bridgewater Associates, in 2018. She made the claim that there were similarities between the world of investing and the poker circuit and that, subsequently, her skills were transferable. Her success with Bridgewater underlined that belief.
What aspects of poker can help make someone a good investor? In essence, poker is a game of investing: you invest chips in a hand for different reasons. You are then either rewarded or suffer losses because of your actions. However, specific elements of poker make it a great game for investors to indulge in to test their skills.
Like poker, investing is a game of skill and chance. You must make decisions based on the information available but also be aware that market forces, like other people’s hands in poker, can change your luck. Skill in poker comes by calculating pot odds, working out the possibility of winning a certain hand based on your information and factoring in the potential variables. Investing is pretty much the same if you scratch the surface; you have some information available, and you work out how much to commit based on that knowledge.
That brings us to a critical part of both poker and investment: your bankroll. To invest, you must have stake money, and to play poker, you must have a stack of chips. Managing your bankroll and ensuring you’re in the game every time a hand comes up is a real challenge. During a poker game, you use the information available to you to make your choices. You may go all-in if you have two aces, and there are two on the table—that’s a solid hand. Would you do the same on a pair of twos, even with a third on the river? Possibly not. In investing, it’s much the same. You commit to something that guarantees a return but hold some back for an investment that isn’t quite as certain.
Deal with Losses
In poker, losses are inevitable. Nobody wins every hand, and sometimes you’ll commit to a play that sees you take a hit. It might be a simple case of having a weaker hand than an opponent, or you might have been bluffed. Either way, you’ll lose chips. The best players lose chips, just like the best investors lose money. Not every foray into forex is successful, and not every stock option goes up. Being a good investor is about handling that loss. Don’t chase the money back; move on and learn from the experience. In poker, if you threw a stack of chips into a hand but the river didn’t bring the cards you needed, you’d need to cut your losses, get out, and start again. That’s solid advice for investors to heed: deal with the loss and move on.
Written exclusively for Merriman.com by: Breanna T. Worden.
Breanna is an investor and poker enthusiast from Carson City. Having spent many years working for investors in London and Tokyo, he settled in the desert with his partner Charley.
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