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Poker Strategy vs. Investment Strategy
by David Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
November, 2009
I enjoy playing poker, and there are many parallels between poker and
investing. I play online on one of the many sites available. They have a tab
called "Poker Strategy" for new players. I clicked on it, and I was struck by
how much of their simple strategies and tactics apply equally to stock investing.
So I decided to translate their "Poker Strategy" into investment insights. While I
have freely substituted investment terminology and added a few thoughts of my
own, the basic structure of the following and most of its main points come
directly from the tutorial discussion at one of the world's largest poker sites.
Decisions for the New Stock Investor
To invest at a consistently winning level requires both time and effort. In other
words, it takes work. To the extent you can, deciding which type of stock
investor you want to be before you start will make your decisions easier. By
"type of investor," I refer to such choices as investing for growth, investing for
dividends, using fundamentals, using technical analysis, and the like. There is
nothing wrong with combining disciplines into a hybrid approach, or using
different portfolios to pursue different strategies. But getting your basic
strategies down--I recommend writing them out--is important.
Make Good Decisions – the Results Will Follow
Even the best investors in the world have losing periods. Don't make the
mistake of expecting to win every time you invest. Your goal should be to make
each investment decision to the best of your ability at all times. If you do, the
total return on your investing will maximize over time, and your results will
improve as you improve the quality of your decisions. Many investors make the
mistake of judging their ability based on the results of each decision. Your goal
should be to make the best possible move--the one with the highest expected
outcome value--every time. The closer you come to this, the better your results
will be.
By "decisions," I refer to decisions to buy, hold, sell, or stay away entirely.
Selling or staying away are investing's equivalents to folding a hand.
The Mathematics of Investing
Like poker, investing is a mathematical game, and it is a game of incomplete
information. That may sound complicated, but it really isn't. On a very basic
level, winning investing starts with the selection of which stocks or ETFs to buy
or (more importantly) to avoid. This is called "stock selection." If you start with
the best stock/ETF evaluations as well as you can determine them, you will
increase your odds of overall investing success. In this context, stock selection
includes not only identifying excellent companies or ETFs, but also determining
favorable prices at which to buy them ("valuation").
Beyond Starting Hands
Stock or ETF selection is fundamentally important, but it’s only one piece of
the puzzle. Once you have mastered solid guidelines for purchase decisions, the
next area you should work on is your play for the rest of the time: "portfolio
management." Not all great stock-pickers are successful investors. They move
too soon or too late, or they don't let winners run, or they hang on to long to
losing positions. The area that separates better investors from the rest is that the
better investors tend to manage their portfolios more skillfully after the starting
stock or ETF selections are made.
This is especially true concerning decisions about what and when to sell.
Portfolio management skills involve risk management, stop-loss techniques,
deciding when a trend has played out, recognizing red flags, knowing what to do
when a company cuts its dividend, top-to-bottom portfolio reviews, and the like.
Even small improvements in an investor's portfolio management practices can
have a tremendous effect on that investor's lifetime success.
Avoiding Tilt
Another meta-skill that should be part of a winning investor's strategy is
avoiding tilt. ("Tilt" is a poker term for someone who has gotten emotional--
perhaps because of a bad result--and starts making bad decisions, perhaps in an
effort to make it all back at once.) Your emotions can work against you, but
only if you let them. Emotional play results in poor decisions and lost money.
Tilting and steaming can happen to anyone, and sometimes the only cure is a
break from the game. That’s okay; the game will still be there tomorrow. (See
this article for a more complete discussion of emotional errors in investing.)
by David Van Knapp, author of
SENSIBLE STOCK INVESTING:
How to Pick, Value, and Manage Stocks
and
THE TOP 40 DIVIDEND STOCKS FOR 2010:
How to Generate Wealth or Income from Dividend Stocks
November, 2009
I enjoy playing poker, and there are many parallels between poker and
investing. I play online on one of the many sites available. They have a tab
called "Poker Strategy" for new players. I clicked on it, and I was struck by
how much of their simple strategies and tactics apply equally to stock investing.
So I decided to translate their "Poker Strategy" into investment insights. While I
have freely substituted investment terminology and added a few thoughts of my
own, the basic structure of the following and most of its main points come
directly from the tutorial discussion at one of the world's largest poker sites.
Decisions for the New Stock Investor
To invest at a consistently winning level requires both time and effort. In other
words, it takes work. To the extent you can, deciding which type of stock
investor you want to be before you start will make your decisions easier. By
"type of investor," I refer to such choices as investing for growth, investing for
dividends, using fundamentals, using technical analysis, and the like. There is
nothing wrong with combining disciplines into a hybrid approach, or using
different portfolios to pursue different strategies. But getting your basic
strategies down--I recommend writing them out--is important.
Make Good Decisions – the Results Will Follow
Even the best investors in the world have losing periods. Don't make the
mistake of expecting to win every time you invest. Your goal should be to make
each investment decision to the best of your ability at all times. If you do, the
total return on your investing will maximize over time, and your results will
improve as you improve the quality of your decisions. Many investors make the
mistake of judging their ability based on the results of each decision. Your goal
should be to make the best possible move--the one with the highest expected
outcome value--every time. The closer you come to this, the better your results
will be.
By "decisions," I refer to decisions to buy, hold, sell, or stay away entirely.
Selling or staying away are investing's equivalents to folding a hand.
The Mathematics of Investing
Like poker, investing is a mathematical game, and it is a game of incomplete
information. That may sound complicated, but it really isn't. On a very basic
level, winning investing starts with the selection of which stocks or ETFs to buy
or (more importantly) to avoid. This is called "stock selection." If you start with
the best stock/ETF evaluations as well as you can determine them, you will
increase your odds of overall investing success. In this context, stock selection
includes not only identifying excellent companies or ETFs, but also determining
favorable prices at which to buy them ("valuation").
Beyond Starting Hands
Stock or ETF selection is fundamentally important, but it’s only one piece of
the puzzle. Once you have mastered solid guidelines for purchase decisions, the
next area you should work on is your play for the rest of the time: "portfolio
management." Not all great stock-pickers are successful investors. They move
too soon or too late, or they don't let winners run, or they hang on to long to
losing positions. The area that separates better investors from the rest is that the
better investors tend to manage their portfolios more skillfully after the starting
stock or ETF selections are made.
This is especially true concerning decisions about what and when to sell.
Portfolio management skills involve risk management, stop-loss techniques,
deciding when a trend has played out, recognizing red flags, knowing what to do
when a company cuts its dividend, top-to-bottom portfolio reviews, and the like.
Even small improvements in an investor's portfolio management practices can
have a tremendous effect on that investor's lifetime success.
Avoiding Tilt
Another meta-skill that should be part of a winning investor's strategy is
avoiding tilt. ("Tilt" is a poker term for someone who has gotten emotional--
perhaps because of a bad result--and starts making bad decisions, perhaps in an
effort to make it all back at once.) Your emotions can work against you, but
only if you let them. Emotional play results in poor decisions and lost money.
Tilting and steaming can happen to anyone, and sometimes the only cure is a
break from the game. That’s okay; the game will still be there tomorrow. (See
this article for a more complete discussion of emotional errors in investing.)
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