I was out of town this weekend in southern NJ, Atlantic City to be exact. After finishing my business at the convention center, I traveled back to the newer casino, the Borgata, where I stayed for the night. I don’t consider myself a gambler and have never liked losing money at the tables. When I gamble, my favorite games have always been craps and blackjack. Until recently, I had never played at a poker table in a casino setting, but I did enjoy the game of poker and have only ever played backyard and basement games with old friends. Many people consider the game of poker to be pure luck, but this is not an accurate observation. Many factors run parallel to the game of poker and the game of stock investing. Luck can play a role, but rules, odds, and money management are the most important components of both entities.
When investing in the stock market, it is essential to have a solid set of rules or a system that has been tested in real time, without the need for backtesting or historical testing. Once the system has been tested, the investor must follow the rules to preserve capital and reduce losses. The investor must also consider the probabilities that his stock will win or lose. Price goals and objectives should be a big part of every investor’s system. With proper money management and calculated expectation, the investor should aim to trade only in situations where the odds are in his favor. In a strong bull market, it may not be wise to start selling a lot of stocks; the chances of making a big profit with this strategy could be very low. Another important component that makes its way into investing is psychology and/or human emotion. Actions are made up of human character traits, similar to the type of people who possess them. Some stocks are risky and volatile, while others are conservative and predictable. The market repeats specific chart cycles and patterns because humans repeat their actions and character tendencies.
Now, back to the poker table; When I sat down and started playing, my first goal was to familiarize myself with the character traits of the players around me. With 10 players at the table, I had plenty of time to evaluate the people I was playing with, without risking a lot of money. After several rounds of play, I realized that the gentleman to my right would only bet on high odd hands and fold all other hands. He was very tense and nervous and would forcefully fold his cards when he was angry. The gentleman on the left also played hands with high odds, but I saw him call some hands that were risky with lower odds. A gentleman across the table was the braggart and he always had a smile on his face wearing a pair of dark glasses. I challenged this man on several occasions and paid to see his cards because I felt he had nothing. Most of the time, he was right and I still beat him with an average hand. I could go on, but you get the point I’m trying to make: all poker players and investors bring their emotions to the table.
I won’t go into the exact rules of playing poker, but I can tell you that only two players are required to bet per round, while the other eight can see their first two cards without risking a hundred. My favorite game is Texas Hold’em, the current rage across the country and one that excites me when I’m in the mood. The two players who must bet represent the big and small blinds. If you are the dealer or any other player at the table, you can see your first two cards for free without betting. If the hand is weak, you can fold and keep your bet.
Here it is where it gets interesting; if I have a decent hand, I can decide to go to the big blind and see the next three cards on the flop, which is still a low risk investment. If the flop doesn’t give me the cards I need, I can cut my losses right away by folding and waiting for the next game. The same is true in investing; I can cut a loss and wait for the next opportunity without risking the farm if I notice a loss right away. If the cards are good and my chances of winning the hand are high, I can either call or raise. A fourth and fifth card (the turn and river) are dealt after the flop and betting continues each round. Once again, I can decide if I would like to call, raise, or cut my losses. The connection I’m trying to make with investing in the stock market and playing poker relates directly to reducing losses (capital preservation and money management) and my chances of winning the game (in the stock market this might be called expectation).
In my opinion, the best game to play at the casino is the $1-$2 no limit style. This means that the blinds are kept to a minimum and in many cases it will only cost you a couple of dollars to see the flop. The “no limit” aspect allows your upside potential to be unlimited, which translates into reversals. If you cut losses and take advantage of the winner, the upside potential of the investment can also be unlimited, especially when using options (but that’s another discussion). Last night I got to see my first two cards for free, eight out of ten hands and I could fold if they weren’t good. If they were good, I would put money on the table after my idea. In the real world, the world of stock investing, you should always invest money in your best ideas. The resulting profit or loss will tell you if you are right. Again, for the umpteenth time in this article, the most important part of both games is cutting losses and moving forward without mixing emotions in the decisions.
All poker players and investors bring emotions to the table, some people control them better while others employ better systems and understand the odds at a higher level. The bottom line is to understand the situation around you and use a sound system to increase your odds. Never bet a hand that represents a low probability of winning, and never take advantage of a loss that could multiply overnight. Cut your losses and get out of the game and wait for the next opportunity because they are always just around the corner.
