A good poker player will think about odds and payouts. A good investor will consider the same while selecting, allocating stocks
Recently, poker as a professional sport has started to catch the fancy of the masses in India. In more developed parts of the world, poker is already considered as a professional sport.
Even stock markets can be considered as just gambling, however, there is much more than meets the eye. I use stock markets as representative of all kinds of financial markets through the article. As in poker, in the long run, most of the money is made by the same handful of participants while the others are just left with the holes in their pockets and envy.
Let us explore what makes comparison between playing poker and investing in stock markets possible? Let us explore.
Game of skills however luck still plays a part: “It is not about the cards you are dealt, but how you play the hand” – Randy Pausch said in The Last Lecture. That comment, though uses cards as a metaphor, was about life in general. This very well applies to poker and investing. The first part of the quote (“the cards you are dealt”) indicates luck while the second part (“how you play it”) indicates skill. Every round you get a new set of cards and you have to decide how to play them. Different players will get different outcomes with the same set of cards. Similarly, in stocks, most of the information is publicly available but can be inferred very differently by different participants. This skill, to see correctly what others don’t, along with the ability to act accordingly is what separates the successful investor or player.
Long term thinking: A seasoned poker will not be ecstatic or disappointed with results of one hand or even a few sessions of poker. They will instead focus on is how their cumulative profits/losses stack up over a long period of with many poker sessions. In the short run, the role of luck is magnified while over a period it is the skills that will matter more. Same is the case with investing. An investor cannot be said to be successful/unsuccessful based on a few good/bad trades or years. It is the compounding over the long term that will matter for wealth creation.
Making decisions with incomplete information: What will happen in future is unknown and decisions in both poker and investing have to be made on assumptions of future. Hence probabilistic thinking plays an important role in decision making. A good poker player will think in terms of odds and payouts while deciding to whether to bet or not and the size of the bet. Similar thought process would be followed by a good investor as well while selecting stocks and deciding on allocation.
Patience: “The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch.” – Warren Buffett. Unlike in baseball, an investor can afford to let go practically any number of ideas till (s)he is convinced. Same goes for poker. Some nights a player might not even get a single attractive bet. In nights like these, investor/player should not get impatient and make bad bets. More often than not participants will end up losing money in these bets.
Courage: “The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.” – Charlie Munger. After waiting patiently when a poker player has a good hand or an investor has a great idea, they have to bet big which requires courage. These kind of high conviction bets are the ones which make the real difference in the bankroll of a poker player or an investor.
Differences: Limited number and known participants vs unlimited and unknown: Poker is a zero-sum game (negative-sum game if we add casino cut), generally played by individuals who make money of each other. The participants are limited and more often than not, known. While betting, a player get knows who the opponent is and their prowess. The stock markets on the other side are much more complex with participation from many kinds of financial institutions, corporates, as well as individuals. On the other side of a trade, there can be anyone ranging from an uninformed individual to an extremely sophisticated global financial institution with an unrestricted access to managements. There are hardly any unkown and unknowable (UU) situations in poker while UUs are a very common feature of the stock markets. Such ambiguity makes investing a much more difficult game.
Scalability and size: The increase in difficulty level also make the stakes meatier. One can probably make (or lose) millions, but to make (or lose) billions one has to knock the doors of the complex world of stock markets. To conclude, there is an eerie similarity in the thought process and temperament required that is required to make money in poker as well as investing. The difference being the size of the pie and the participants vying for it.
Just for the records, my intention with this article is not to encourage anyone to participate in any poker or markets.
ON SIMILAR GROUND
- A good poker player will think about odds and payouts. A good investor will consider the same while selecting, allocating stocks
- While betting, a player knows the opponent. Stock markets are much more complex with many financial institutions, corporates
The writer is head – portfolio management services, Equirus Capital
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