What did poker teach me about the investing?

Earlier, I discussed how I love chess and its role in investing. This time, I will discuss Poker and its similarities with the stock market.

I love the game. It requires calculations, patience, risk-taking ability, and minimising tells while maximising the information we receive. Many variables decide the outcome of a game, and that is why I love it. There are so many dimensions to it that make it so complex but exciting.

I was introduced to it relatively late, about three years ago, but I grew obsessed with it and, at my peak, played thrice a week, with each session multiple hours long. I can't help but notice the numerous apparent similarities between a game of poker and investing, which prompted me to write more on this topic. 

Let's assume a guy called Anshul(me) is simultaneously playing poker and investing in the stock markets. He is well above average in calculating the odds of most situations in poker and is equally good at understanding businesses and making decisions. During the poker session, he is dealt with aces against someone, and he correctly deduces that the opponent holds an inferior pair, such as Jacks. He goes all in with odds in favour (91% odds of a win) but loses. Does that mean he played wrong? Similarly, he finds a business with near-perfect due diligence that will almost surely make him money, but its factory catches on fire, and they end up with heavy losses. Again, Did he do something wrong?

NO

1. Be process-oriented; let luck do its thing

Your chances of success in a singular event are not 100% dependent on you. There are too many external variables that you can not control, and hence, the only thing you can do is stay process-oriented and hope for the best. By recognising the role of randomness or luck, we realise that the world is probabilistic in nature. However, Notice how I said singularly: Singular events are very dependent on luck, but an extended period of poker/ investing will lead to your skills and process being the true differentiator, and that is the goal. I could be in loss for the day in poker; that's fine, but it's not fine if I lose the whole year. Similarly, It's fine If I lose money on a stock, but it's not fine if I wipe out my capital and call it bad luck.

By sticking with it for a long enough time, you ensure that you won't be wiped out of the game and allow yourself to prove yourself.

How do we stick long enough? Don't take huge risks without proper work, and recognise the role of luck/randomness in your success and failures. It's a bit ironic that we can minimise the role of randomness in our results by recognising them in our lives. 

Now that Anshul knows to stay process oriented, he keeps playing while searching for stocks to buy. Unfortunately, all the hands that he is dealt are terrible, and all the stocks he finds are subpar at best. Slowly, he grows frustrated and tilts; he bets heavily on terrible cards and invests money in a terrible company that is very expensive. Anshul again makes a loss and learns a lesson.

2. Pick your battles

Successful poker players and investors share a common trait: the ability to wait on the sidelines. Saying no is probably the strongest skill set one needs. Waiting until the odds are stacked in your favour is a luxury all have, but we never practice it. There will always be opportunities waiting to be grabbed, but they take their sweet time, and we must let them wait until they do.

This reminds me of a quote: "A tiger waits until it finds the weakest animal to hunt. This is the epitome of trading: not picking the hardest battle but picking the battles that favour you."

Now, Anshul has learnt his lesson and is patiently waiting for an opportunity to strike in the stock market and the poker table. As the day progresses, he notices one of the players' tendencies to aggressively bet and bluff almost constantly. Simultaneously, the stock market is going through an aggressive correction, and the markets are bleeding. Anshul is dealt a decent hand, and he strikes and wins almost all the money of the aggressive bluffer. Similarly, he infused capital when markets were cheap and made much money. He didn't do anything extraordinarily right; why did he win so much?

3. Reading the room

Most profits aren't made by your genius but others' foolishness. You do not need to create opportunities or be the smartest in the room; you just need to be above average most of the time. A good poker player can take advantage of others' mistakes, as Anshul did above. Similarly, investors like Warren Buffet make the most money by identifying others' foolishness. Read the room, recognise what's happening, and act accordingly. 

Similarly, you should also learn when to fold or accept losses when the odds are not in your favour without letting the sunk cost bias take over. Don't lose more money to save the already lost money.

It amazes me that a board game encompasses so many nuances relevant to the real world. It has a lot to teach and should definitely be played. I have enjoyed playing it and learnt a lot from it. I hope you all do the same!