Many years ago before my investing “career” I was an avid “No Limit Texas Hold Em” (NLTH) Poker player. I wouldn’t have deemed myself a professional player but I played online every day for hours and had multiple tables open at once. I flew to Vegas just to play the tables, no Cirque Du Soleil shows for me! I’ve spent over 10 hours at a table before.
As the years have gone by a lot of people continue to ask me how I was able to dive into investing and pick up the principles so quickly. First off, I want to be clear that nothing in my investing career has come easy. I’ve had to read a lot and after I read a lot I had to read some more in order to adequately educate myself. However, it wasn’t until the other day I realized that playing NLTH gave me a significant advantage when I began to learn about investing. You see, there are a lot of similarities between “No limit Texas Hold Em” and the principles of investing.
Value of Each Hand
For those of you unfamiliar with NLTH each hand has a set value that trumps another hand. Knowing the value of each hand is imperative, just like knowing the value of a company you decide to invest in. Think about it, there’s a saying in NLTH “If you can’t figure out who the sucker is at the table, then you’re it!” For those of you who have played NLTH or still play on a regular basis think back to a time where you were playing and their was that one person at the table who had absolutely no idea what they were doing. They thought a pair trumped a straight, absolutely foolish, they shouldn’t have even been sitting at the table in the first place. Well the same holds true for investing, I can’t stand it when I read stuff online about “penny stocks” or “the next Apple” only to find out the company is riddled in debt and hasn’t made any money in the past 5 years. I especially can’t stand it when I’m at dinner parties or gatherings and hear people regurgitating what they read in Money Magazine, heard on Jim Cramer’s Mad money, or saw on CNBC.
Before you even think about sitting down at a NLTH table you better know the value of each hand and before you invest in a stock you better know the value of that company as well!
In NLTH there are odds and probabilities of acquiring a truly valuable hand, most wouldn’t see the similarities between probability and investing but I certainly do! For instance, what is the probability of you achieving annual returns of 25% annually on a continued basis? Slim to none! Warren Buffet, the greatest investor of all time averages annual returns of 20% annually, so what makes you think you can do better after reading one book or subscribing to some newsletter that offers the world? You would be better off sticking to basic investment principles instead of chasing returns that are far out of your reach.
Risk vs Reward
Once you learn the basics of NLTH it’s easy to think you’ve got everything down that you’ll ever need to know but that couldn’t be further from the truth. Just because you know the rules to a game doesn’t necessarily mean you know how to “play.” Understanding risk and reward is the first lesson a poker player should learn and master. The same goes for investors in regards to asset allocation. Why in the world would you risk 75% of your capital for a chance at making 10% on your money?! That is absolute insanity to me and is something I will and could never understand. The same holds true when I’m playing a game at the table and a guy raises $100 on a $10 dollar pot. Makes absolutely no sense to me!
There is a term that is used in NLTH when a player is playing on nothing but pure emotion because they are either frustrated or scared. It’s called “Tilt” and I wish there was a word for investors as well. We’ve all been there, I know I have. The most rational of arguments couldn’t get me to budge on my “hope” or “position” that the stock would turn around and make a comeback. I saw all the bad headlines, I knew I was staring at a loss of 20%, but if I sold I would realize a definite loss and be considered complete and utter failure!
I have some news for you that the majority of people are not willing to tell you. When it comes to investing you are more likely to be wrong than you are right. Yes you read that correctly and I will say it again, you are more likely to be wrong than you are right! The difference between being a true investor and just some random guy off the street buying stocks is that you exit your losing investments the second you realize you are wrong. That’s right, step up to the plate admit that you were wrong and move on. While easier said than done I can guarantee that you will preserve far more of your capital using this strategy than wishing and waiting for your analysis to be right.
I use trailing stops to keep my emotions in check, I would recommend you adopt a similar strategy if you do not already have one.
Do you have any life experiences that made understanding the principles of investing easier?