I think poker is a very nuanced skill game that has its share of luck factor but not much. I find lot of overlap in skills between poker and investing/trading in terms of evaluating probabilities, weighing expectations, handling wins/losses, thinking outward etc. These are some of my thoughts on the overlap (Apologies in advance if my poker terminology is not upto the mark.)
Infinite hands - There are more hands coming after this one so its OK to fold and wait if the risk:reward isn’t favourable. This could mean waiting for a better stock to invest, better price to invest in a stock you like (or averaging downward on corrections), staying in cash 20-50% etc. The more you fold and know when to fold, the better you are as a player.
Royal Flush, Straight Flush are rare events - Sort of like positive black swans. Four of a kind is a little more common relatively - When you find hands of this kind - Go almost all in. This is like running a concentrated portfolio with 30-40% allocation in a single stock. They do come once in a year or two. Unlike poker where going all in might spook the table into folding, the market actually allows you to do so and win bigger rewards.
Always look outward as much as inward. If you have a full house, be wary of an opponent holding a four of a kind (Verify probabilities). If you have flush, be wary of a full house and in straight, be wary of a better straight or a flush. Always look outward. In investing, along with confirming evidence to your position, always look for disconfirming evidence and weigh them without bias. Don’t back down when you have a probable winner but allocate capital accordingly (based on disconfirming evidence) as you would do in poker.
Play all hands (iterations) and be prepared to lose small amounts (the big blinds) and wait for the big winner. Payoffs are disproportionate, losing many small amounts is alright as long as you can stay put for the big winner. In investing losing small amounts could be opportunity cost, underperformance in shorter timespan etc.
Don’t let hubris come in the way after winning a few hands. After a streak, it might be better to cash out and wait before mean reversion kicks in. Dopamine can kill skill temporarily. Same applies to investing. Step back and breathe, don’t stop learning and be prepared to handle unforeseen circumstances. Sometimes after a big streak, it might be better to play a table with smaller limits to stay in the game but at much lower stakes until the hubris washes off.
When you fold, don’t rue the opportunity if the hand actually turned out better than you thought. You acted based on inputs you had and the outcome shouldn’t change that. Remember, infinite hands!
It is not about the money you make per hand or the number of losses you had but the overall stack of chips/portfolio performance. Remember results are disproportionate in both so less than 5% of your investing decisions could lead to over 80% of your overall returns.
No matter how good a player you are, never take your entire capital into a no-limit table. Similarly, invest in assets other than equity.
Coming to luck vs skill, if you folded numerous hands before a quad came your way, was it luck or was it skill? Was it skill because you folded numerous hands or was it luck because the quads came your way?
I feel I have become a better investor playing poker (recreationally and not professionally however) in terms of capital allocation (kelly’s formula is worth a look) and money/risk management. Please add your own if you are into poker.
I myself have used this example in several places and said “Investing is not like playing Poker or Chess. It’s somewhere between the two.” I play Chess, personally. I spend a good portion of my mornings watching Chess videos on YouTube. I recently followed many matches in the Granke Chess Classic 2018 with great interest.
The following article offers some insights:
Interestingly, this could be because all of them are zero sum games. I understand that investing is not exactly a zero sum game, but it comes close when you think about it as ‘Investor Vs. The Market’. A successful investor does not make outstanding returns by agreeing with the market. He makes it by betting against the market and being right.
If you play Poker with the multiple Joker’s in pack it might justify. There are too many Jokers, Trump, Rogue management, Recession, Technology making industries obsolete, Kim Jong Un, Ji XingPing, Putin…Micro economics, Macro economics keep counting. Still interesting Juxtaposition
I play poker both professionally (occsaional) and for recreational purpose and I would say that it is slightly a force fit for an investor. Thanks for bringing this up as I also had thoughts on similar lines. I can identify with poker skills a lot if I am a trader. One thing is common for sure that both poker and investing are addictive if you think you can play well.
Honestly speaking, i think a good exposure to poker should be an extremely valuable tool for stock market investing. In fact, if you are are a retail investor, the principles behind poker give you an edge in investing, as the market does not respond to your individual moves.
A quote about poker comes to mind - You cant win if you don’t bet. You can’t bet if you have no money. Poker tradeoffs is essentially about balancing these two. Very similar to stock market investing, no?
Quoting this “Always look outward as much as inward.” I have a variation on the same theme. Count the number of ways you can lose, not the ways you can win. if you have a straight, and board shows potential for flush or fh, bet decent. If the board is scattered, bet big. If there is a stronger straight, bet but be reasonable.
Fantastic game for on-the-spot odds estimation. Should be a required skill for investors imho. helps you understand about greed and odds.
(on an aside, in free time, also consider traffic, and how it relates to getting ahead in life).
Thanks for your pointer to HIL. Invested and very bullish possibly for the next decade or so.
On a separate note, where is your portfolio thread?
especially with a software that is dealing a million hands a day.
I have had full house on flop, stronger fullhouse on turn, only to get killed by straight flush on river.
Markets are a partial information problem, so chess is not a suitable analogy. Analysis is not everything. Probabilistic estimation is more relevant. The edge that poker gives you is in figuring out odds. The edge you have when you bring this skill to investing is, the market doesn’t give a damn about you (unless you are buying 10 percent of ITC, that is). So your actions have lower reactions, basically, you don’t have to worry about everybody folding.
@dineshssairam - Regarding chess, I wonder if you have looked up the recent games between alpha zero vs stockfish recently. I think (and i could be very wrong) it illustrates my point about exhaustive analysis vs probabilistic actions very nicely. (I do need to understand the monte carlo algorithms alpha zero uses to be more definitive here).
Just a random Saturday musing that, to me, Contract Bridge comes closest to investing. You value your partnership hands based on clues from the bidding and either make the best bid ( to get maximum points with good play), i.e. go long, or push opponents to overbid and bring them down, i.e. go short. A risk based valuation of your & partners hand to maximise your score is the object of every deal.
After the bidding comes the play. You get to see only 50% of the cards and have to plan, make inferences and take risks and if needed put opponents on a wrong track. The play is successful when you make the contract you bid, or put the opponents down on the contract they bid, with good defence. General skills are in counting of all kinds, inferences from play, assesing odds of how the cards will break and some (not as much as folks talk about poker) player psychology.
Besides the real beauty is that no hand repeats, so every deal is new (over 635 billion combinations from a deck of 52) where only general principles can be applied and there are only patterns of situations. Similar to investing.
Scoring in the game is also interesting. The same 10 deals (or 15, 20 or any number depending on the tourney) are played by everyone and for every deal a relative score is published. The winning pair is one with the highest relative score. So it eliminates any luck that someone landed with a great contract and some with bad. It’s like for the same set of cards, how much did you make relative to others; and repeated 10 -15 times.
I am sure there are some bridge players in this group. DM me and we can play sometime.