The Gambler
Playing Poker and Investing – What can we learn?
7 elements discussed for your Poker and Investment education
I play poker semi regularly with a group of local guys. It was supposed to happen once a month. I think due to the toll it generally takes, this has been pushed out to six monthly. We have proper betting chips and follow the texas holdem rules. If it sounds high stakes and very serious, it isn’t. You buy in with twenty dollars and most of us have to read the rules each time to remind ourselves how to play. Even though the largest bet is two dollars, a collective gasp goes around the room at the high roller making the bet. Essentially it is a male version of a female book club. We sit around chatting about everything from our bad taste in music, architecture to vasectomy’s. I think most of group has had the pleasure now.
Why am I telling you about this little hobby of mine? Well, two reasons. Firstly, it’s a little more exciting than hearing about investments. Secondly, there are some parallels and learnings to apply to investing or how people think about investing. I feel like I may be revealing too much of my poker strategy here. However, after doing rather well at poker I have recently had my first major loss. I think the rest of the group have caught on to my strategy and have now conspired against me.
Here are the parallels or learnings:
- You need to be in to win.
In Texas Holdem you get dealt two cards initially. Your final three are taken from five that are dealt onto the table, that other players can also use. You have no idea what your final cards could potentially be. Many fold before they see any of the cards on the table for fear of losing fifty cents.
I come across investors like this that want a better return but don’t want to take the risk that markets may turn. Investment is about risk and return. The more risk you take the more you should be rewarded for it. However, unlike in poker you can manage your risk. For example, why would you invest in one share vs an entire market that can produce a good return with less risk.
The key though, is that you need to be in to win. This is the same with investing. If you want the returns, you will need to take the risk and no doubt feel some pain. Hang in there, your discipline is what you will be rewarded for, if you have invested well.
- Speculating/gambling vs investing
Many people think that because something has gone well in the past, it will continue to do so. In poker, the first two cards you are dealt may be great, say a pair of aces. A player can think that just because they have started well it is going to end well. They bet hard, maybe placing two dollars in the kitty. Fatal mistake. Why? Firstly, you have let your competition know you have two great cards. Most, if not all will fold unless they think you are bluffing. If someone stays in, you keep betting believing you have the goods. When it comes to the big reveal you still only have your two aces but our opponent has a full house.
This also happens with people who look to invest. They hear a hot tip, or they see something rising in value, so they jump on board and buy some of that asset. A recent example is Bitcoin. People don’t seek any professional advice they just listen to the hype or their uncle, taxi driver, neighbour over the fence. What’s even worse is that when the investment starts to tank they stay invested thinking it must be a blip, how could who ever they heard it from be wrong? As a professional Adviser this is most frustrating. You don’t pay me to tell you what you want to hear. Would you take medical advice from your uncle, taxi driver, neighbour etc?
You may think of injecting your funds in to one share or a small group of shares as investing. What do you really know about those companies? Analysts also won’t know everything about those companies as most of the information they analyse is historical. Pumpkin Patch was once the darling of analysts and some fund managers. Where is it now? http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11757790
The key. Speculating is investing into something you know very little about, or putting all your hopes into a concentration of assets. You may as well come to the poker game.
- Predictability
If it sounds like a bunch of middle-aged men getting together for a laugh, it is. And that is about as predictable as the evening goes in Devonport. No one knows on the evening how it is going to play out.
Investments can be predictable. We can estimate expected returns over the long term based on statistical modelling. Because investing involves broad diversification, performance is really a number of variables that we can use to determine behaviour.
We know that there will be periods of negative performance, we just don’t know when. Over the long term, investments usually grow. How much they grow depends on your risk profile and investment strategy.
- Timing
In poker, being that we are all a bunch of semi professionals our timing can be a bit off at times. I myself have had a spectacular hand and revealed before I was supposed to through overexcitement. I won’t use the common phrase or poker terminology to describe this. Needless to say you quickly become the butt of everyone’s joke.
Emotions impact on investing. Often people try to time the market, buying in at a time when the market is strong through overexcitement/greed and fear of missing out. (FOMO) Similarly, they sell when the markets are down for fear of losing it all. Trying to time the market and let the media into your thinking is a fool’s game. Periods of high return come in short waves sometimes. If you miss that period, your returns will be much lower than the market itself.
Often people come to advisers as they think we can provide outstanding returns. If I could I would charge a lot more than I do, in fact I would potentially take half of your earnings. What we can do is provide you with a well-researched strategy to help you achieve your goals. This is based on personal experience in investing, years of experience in financial markets and obtaining one of the highest qualifications you can through years of study.
If you are after amazing returns you need to speculate and that involves taking on much more risk.
- The Hangover
I always look forward to the poker evenings. I kind of don’t at the same time. Normally the evenings go through until the early hours of the next day. Despite common calls from the same person at about mid night. “Right let’s put a limit on this” That same person is often one of the last to leave. Often someone will pull out a bottle of whiskey. The worst yet is some Japanese rice wine. We were conned. They sold it to us on the basis that it was $500 a bottle, which we googled and confirmed. We all had a go. Turns out the bottle was a gift and the host was trying to get rid of it. It was awful and could still be tasted the following day.
With investing there is cognitive dissonance. It is similar to a hangover in that if you stay away from the media and reviewing your portfolio (the rice wine/whiskey) you will suffer less. Essentially, it is the feeling of “Have I done the right thing?” If you pick up the papers the next day and the headline is “Share market about to tank!” you will suffer severely. If you review your investments performance and it has dropped in value, you will likely feel the same way. Remember, this is short term. Over the long term your investments typically grow.
Playing poker is fun. Investing should be quite boring. If investing is feeling like it is exciting, then you may possibly be speculating which is a very risky business. However, it should feel rewarding to sort through your finances and goals. I doubt someone would describe it as exciting though.
If your poker isn’t fun, then perhaps you are being far too polite to each other.
- Performance
There are different forms of performance when it comes to our poker evenings. Winning, how long you can stay in for and under what circumstances you can turn up. We have had one player turn up with a broken neck.
Winning at poker is a great feeling. The rewards are great too. Although, when the top bet is $2 the fruits of your success are free coffees for a week. During a session you can move from a deficit to quite a surplus.
Investment performance, like poker fluctuates a lot in the short term. Like our poker group, you really need some steel to hold during times of poor performance. Investors, in a good strategy, have always been rewarded for staying the course.
Summary
Poker should be for a bit of fun only, it is speculation. Investing in one asset is also really speculation. Only invest what you can afford to lose.
New Zealanders like to think they are great at DIY, or they can just ask their neighbour, uncle taxi driver. I have learnt my lesson, I am terrible at DIY. There is also a major difference between building your own fence and designing an appropriate investment strategy. One, if it goes wrong could cost you hundreds of thousands of dollars.
Use a professional to design a broadly diversified portfolio that suits your risk profile which will give you some predictability.
Stay away from listening to the media or so-called gurus. Only deal with an Authorised Financial Adviser who can counsel you through tough times in the markets place or out of place media claims.
Don’t try and time the market. If you are investing, you should be in it for the medium to long term. Your investment should grow over time but expect volatility in the short term. You can’t achieve good growth without taking on some risk.
Disclosure:
The names dates and proceedings of these poker evenings were omitted to protect participants from being barred from future meetings by third parties.
To be clear. This is not an endorsement that you should play poker to make money. It is an endorsement that you should play poker to have fun.
The advice contained in this document is general in nature and should not be taken as personalised financial advice. For personalised investment advice contact an Authorised Financial Adviser like the author.
- Posted by Isbister
- On January 8, 2018