Editor’s note: This article was first published in October 2013, following a Bloomberg TV segment called “Poker Night on Wall Street”.
David Einhorn of Greenlight Capital is one of the great fund managers and, like many other hedge fund managers, he is a big poker lover. An addict, more like, given that in 2012 he made it to the final of a world championship event.
For some reason, these people, who are used to taking risks every day, tend to see parallels between poker and stock market investing. Einhorn shared on Bloomberg TV some tips for being a good poker player and, therefore, a great investor.
1. Practice makes perfect
Einhorn has been playing poker for a relatively short time, since he started in 2004, but he practised very often with friends. Two years later he took part in his first big tournament, and six years after that he was a winner at the World Series.
Whether we are talking about poker, investing or a particular profession, excellence comes from practice, and the more you practise, the better you will get. There is no distinction or victory without practice. The stock market is no different: it would be unfair for someone who has devoted no time at all to finance to earn higher returns than someone who has spent years on it. It does happen occasionally, but other things can happen too.
2. Think with logic and mathematics
Some situations in poker may seem difficult, but they become very simple if you use mathematics. You have to think about how much money you have, the cards you hold, the probability of getting the cards you need and, in short, your chances of winning.
Sometimes we risk money in the stock market on risky stocks, even knowing that the odds are against us. You always have to weigh up the possibilities and probabilities for and against.
3. Play for the long term
Anything can happen in a tournament or in a single evening; even a beginner can win two days in a row. In the same way, in the stock market a tournament is the day-to-day of volatile markets, but good poker players stand out because they have a winning record over time.
Over time, in both the stock market and poker, skill matters far more than luck.
(Read: Warren Buffett talks about luck in an interview)
4. Be disciplined
The secret of success in the stock market, in poker and in business is exactly the same: discipline. The biggest fiascos, both at the poker table and in investing, happen when someone strays from a proven system that was working perfectly. Likewise, the absence of success and the arrival of failure come down to that lack of discipline.
(Read: 5 principles of value investing)
5. Don’t bet what you can’t afford to lose
Some people, to win what they don’t need, even bet what they do need. At a poker table you should never put down money you are likely to need. In the same way, in the stock market you should not invest money you will need in the next 5 or 10 years. Only then will you avoid big disappointments.
Further reading
Featured image: slgckgc, CC BY 2.0, via Wikimedia Commons.
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