9 Investing Lessons I Learnt From Poker: Part 3
The World Series of Poker, the biggest annual poker event, just concluded a few weeks ago. Some famous names from Wall Street, such as David Einhorn and Steve Cohen, are avid poker players and took part in the event.
It comes as no surprise that some of these investing greats share an interest in poker because of the similarities between poker and investing. These include risk management, emotional control and assessing value.
In light of these events, I have decided to write a three-part series on nine investing lessons I have learnt from playing poker. This is the third and final part of the series.
Lesson 7: Research, research, research
Professional poker players, unlike what you may think, actually spend a significant amount of time away from the tables studying the game. After a long session at the table, they may take a few hours in the day to review the decisions they had made.
As investors, we should never stop learning and educating ourselves. Practicing and being involved in the stock market is definitely a good way to learn. But we should still set aside time to evaluate our decisions and to continuously improve our approach.
Lesson 8: If in doubt, fold’em
Most winning poker players employ a strategy that usually only involves playing a small range of hands. This can sometimes range from just 5% to 25% of hand, depending on the number of players on the table. So this means that for a good proportion of the time, the poker player will just fold and watch what happens between the other players.
As with poker, we do not need to pick up that many stock market winners to enjoy outstanding returns. All we need to do is pick a few good stocks that can propel our portfolio to greater heights. Warren Buffett once said that we should treat our investment decisions as though we only had 20 investments our whole life. This would mean that we only buy into a stock that we strongly believe in.
Lesson 9: Growth is exponential
If you look at the winnings of some of the poker greats such as Phil Ivey, Daniel Negreanu, and Charlie Carrel, you will notice that they start off with just a tiny bankroll. For example, Charlie Carrel started off playing poker with just $10 in his account. This had ballooned to over $5 million in net profit. The winnings came slowly at the start but as his wallet got thicker, so too did his winnings which grew at an exponential rate.
This is exactly how compounding works. We can start off with just a small investment portfolio but as our investments grow, so too do our future returns. By reinvesting our profits back into our investments, we can grow our returns exponentially, just like how poker players grow their winnings. Because of this, we must start investing as early as possible to maximise the compounding effect of our investments.
The Foolish bottom line
Poker players are highly sought after by hedge funds and investment firms. This is because the skills that these players have developed and excel at are useful in the investing world as well. Hopefully, these nine investing lessons can teach all of us how to make better investment decisions in the future.