On the surface, the worlds of poker and finance may appear quite different, but there are far more similarities than differences. Success in each is unlikely without discipline, continuous learning, and a healthy dose of patience. I became a financial advisor to use my in-depth knowledge of the markets and leading businesses to help others pursue their financial goals. I became a recreational poker player because I was attracted by the camaraderie between players and fascinated by the game’s complex challenges. I decided to combine my two passions by helping players with financial planning and investing. As I began to advise some players, the parallels between the two worlds have become very apparent. To illustrate, I’ve come up with a list of 10 characteristics and strategies that cross over between poker and finance. I hope you find the similarities intriguing. Beyond that, perhaps after reading this article, you’ll find it worthwhile to invest more time to improve not only your poker game, but your financial life too.
1. Having a plan for the next street
Advanced poker players don’t consider their actions in isolation, but as part of a broader strategy for what actions they will take on the next street and how the table image they create with other players will benefit them down the road. Advanced investors and advisors develop a strategy based on clearly defined goals and priorities, then ensure that each position they select for their portfolio aligns with this strategy, as it plays out over years or sometimes decades.
2. Smart risk-taking
Taking smart risks can be rewarded in both poker and investing, but careless or excessive risk-taking often is counterproductive. One key to winning in poker is making plays that show positive expected value (EV+). Similarly, in investing, one key to improving the probability of realizing your desired goal is carefully considering the risk you take on with an investment, in light of your personal risk tolerance and the expected value of the investment.
3. Understanding your environment
To remain ahead of the curve, poker pros must adapt their tactics to their opponents’ styles – nitty, tight aggressive (TAG), loose aggressive (LAG), etc. – and exploit their weaknesses. Similarly, investors can adapt their tactics to market movements and exploit price inefficiencies. For example, an investor may decide to purchase a stock or mutual fund that has declined in price in response to temporary market declines, but that still has positive long-term prospects. An experienced advisor can help distinguish routine price fluctuations from fundamental changes in business conditions, corporate strategy, or leadership.
4. Powerful emotions: anger, fear, and elation
Players who give in to anger from inevitable suck-outs and bad beats, or to “winner’s tilt” when they go on a heater, often play incorrectly. Those who remove emotion from the game will continue to make EV+ plays and maintain their edge at the poker tables. Many investors under-perform the markets. When markets decline, their fear of additional declines can cause them to sell, locking in their losses. Similarly, during steep market advances, they can give in to elation and buy “winners” at elevated prices. A professional advisor can moderate investors’ emotions during volatile periods, reminding them to stick with the plan they developed ahead of time when cooler heads prevailed.
In both endeavors, emotions are your enemy; rational, analytical thoughts are your friend.
5. Bankroll management
In both poker and investing, it is critical to effectively manage your funds so that you can take advantage of opportunities that arise. Suppose you have a $10,000 bankroll and you expect a positive result from playing in the WSOP Main Event; do you play or wait for the next positive, but smaller buy-in opportunity? If you play and bust out, you have no bankroll and must skip the next event. Similarly, investors need to evaluate whether it is better to be fully invested in current opportunities, or maintain a cash allocation that allows them to take advantage of future opportunities.
6. Diversifying your game
Millions of players focus on one game: No Limit Hold’em (NLH). As a result, the fields for many NLH events are strong. You may have considered adding other games – such as stud or Pot Limit Omaha (PLO) – to your “portfolio.” Fewer players compete in these disciplines, increasing your odds of finishing tournaments in the money. Some investors know and rely on one asset category, such as currencies, growth or value stocks, exchange-traded funds, or bonds. A professional advisor is familiar with multiple asset categories and can help you diversify without learning a new “game,” improving your opportunities to succeed in a variety of market conditions.
7. Benefiting from experience
Having the experience from playing millions of poker hands gives you the tools to make the correct play, even when facing the most difficult decisions. So, too, having years of investing experience gives a professional advisor or investor the tools to react appropriately to even the most challenging market conditions.
8. Having a coach in your corner
A poker coach reviews your play, corrects mistakes, balances emotions, and makes adjustments to get you to the final table in tournaments, putting you in position to win. An experienced advisor helps you develop a financial plan, reviews your progress against the plan, moderates your emotional reactions, and makes adjustments to the plan when needed to put you in a better position to pursue your goals. Both roles require a partner who understands your attitudes, goals, and experience so they know the most effective ways to guide and support you.
Like a good poker coach, a good financial advisor understands you, so they know the most effective ways to guide and support you.
9. Luck vs. skill
In poker, the public view is that luck determines success, but experienced players know that skill prevails in the long run. In investing, a debate has raged for decades; one camp believes that outperforming the market is random (the “random walk theory”), while the other contends that skilled money managers can beat the market by selecting investments that they expect will perform better than average. While there is some merit to each view, there is little doubt that solid analytical and money management skills can help you work toward your financial goals.
“If there weren’t luck involved, I would win every time.”
— Iggy (@Iggylicious) March 25, 2009
To be perfectly fair, there are both random and non-random aspects in the financial markets.
10. A single session should not be the measure of success or failure
Experienced players know they can make the right plays and still lose over multiple sessions, but that sticking with a sound strategy and playing correctly is profitable over the long run. Results from particular sessions are less important; a player’s win rate over thousands of sessions matters far more. By the same token, experienced investors know that the price of a single security can rise or decline at any time for a variety of reasons, for example, its popularity with other investors. Therefore, one useful strategy is to hold a basket of diverse securities, which tends to even out the performance of an investor’s portfolio over time.
Short-term results are much less important in poker and the financial markets – it is the long-term results that get you where you need to go.
Ed. note: The author is a Registered Representative of LPL Financial. Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC; not affiliated with Empire Financial Advisors, Inc.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.