Richard Goh, April 21, 2020
Emotional control is key to consistency. How are poker skills transferable to both trading and investing?
____________________When I was 16, I picked up the beautiful game of poker. I was attracted to it because unlike conventional gambling games – baccarat or Singapore’s “ban-luck” - skill and theory played a huge factor in winning.
After 828 hours (and counting), I have grown as a player. From the guy who is overly attached to his Aces, or the player who clings to the miniscule hope that he would flop a full house with 2-3 and get handsomely paid off. My experiences taught me many things, and I believe several of those lessons translate to investing too.
Emotional control is key to consistency
In poker, I have faced unbelievably bad bouts of misfortune. And when that happened, I used to get ‘tilted’. Described as being in a state of mental and emotional frustration, tilted players end up acting over-aggressive and making less than optimal decisions. Recognizing when I am on ‘tilt’ and either leaving the table or actively resisting the urge to gamble became key for me to improve.
Similarly, when trading, one might need to take a realized loss and stop chasing bad money. A series of bad investments might also lead one to feel depressed and more likely to gamble by leveraging up or adopting a riskier portfolio to “make it all back”. These actions, however, deviate from your original strategy and you can end up even worse off.
Not every hand looks a winner but play the right odds
Expected Value, as many of you would be familiar with, is a calculation that multiplies your probability of winning with the expected payoff. In poker, sometimes you call with a worse hand because you know that hitting the necessary card will guarantee a large win. For example, small pocket pairs have 7:1 odds of making a set on the flop, so if you believe that calling an initial raise of $5 makes you more than $35, you should make the call.
But not every hand is playable. For example, calling with a hand like 7-2 offsuit is poor decision making. You would need the flop to have two 2s or two 7s to be sure you made the best hand. And if that happens, your opponent likely has nothing, and you cannot extract any value!
Similarly, in the market, you would find many companies that don’t immediately look like winners. The trick is to identify which have high payoffs if a certain event occurs and invest in them as value prospects. A cheap price isn’t always promising, so being selective over your small bets is recommended. And if this investment does not pan out as hoped, knowing when to quit is equally important…
Stop chasing bad money, the best players fold often
In poker, one of the biggest instincts you need to go against is calling in the hopes of hitting a miracle card. If I must call an additional $30 to win a possible $100 already in the pot, I need at least a 30% likelihood of hitting a card that puts me ahead of my opponent. Much less, and I should be folding.
This applies to trading in the market. As the chances of a reversal grow slimmer, a disciplined trader needs to know when the likelihood of turning the trade into a profitable one has run dry. One might be tempted to pump more in – because “it looks like it has hit rock bottom”. Sometimes, the technical indicators are right, but sometimes, just blindly fighting a trend is chasing bad money.
Understand the why, and not the what
This fourth tip is especially important for beginners to the investing and trading market. In poker, I became a much better player after I started deliberating the reason for my actions. I no longer played based on my cards alone, but understood the possible ranges of hands my opponents had, and what they perceive I would have based on my actions. Thus, against some players, I would go all-in preflop with Aces, and against more conservative ones, I would try to trap them into playing post-flop.
I remember starting out as a beginner in investing, reading stock picks on Motley Fool or forex analyses on DailyFX. I would follow the advice with a demo account and was jubilant when I profited. Only after a series of losses did I begin to question myself. The truth is, it’s not enough to know that a company’s P/E ratio is below industry averages or that there is a sudden spike in the demand for oil. As investors, you need to ask the underlying questions. Which company stands the most to benefit? Is the share price truly undervalued or are there other factors in play apart from current earnings? Ask questions, don’t ask for answers.
Recognize your edge on the poker table
“Look around the poker table. If you can’t see the sucker, you’re it.” Now I cannot be sure who this quote was credited to – either professional poker player Amarillo Slim or legendary investor Warren Buffett. Regardless, both men are at the top of their field and this piece of advice is something I take to heart. At every poker table, I always try to figure out the opponents I have an edge over. Maybe I have a slight read on when they are bluffing, or they are prone to making reckless mistakes when the pot is inflated. These are the players I try to get into a pot with. And there are some whom I just know would crush me, and I avoid playing a huge pot unless I’m confident of having the best hand.
Likewise, trading and investing can be a zero-sum game. You want to maintain an edge over others, and the best way to do so is being more informed on the subject matter. Reading the news and diligently studying a company’s track record are all essential steps beyond just looking at numbers and technical indicators.
Beyond the poker table
Well, that’s it from me this week! I had a lot of fun relating my experiences in poker to investing. And for those of you that have never tried the game before, give it a shot. I think you’ll find it invigorating for the brain and who knows, if you become good at it, you just found a new stream of income! Stay tuned to Wealth Wonka for tips and tricks of the trade.