One of the best ways to critique an investment strategy is to call it a “game.” It involves the blatant waste of money, the desperate self-deception to play a losing game, the compulsion that can only end one way“Once she has acquired a taste for gambling, she will never leave the roulette table, but, out of sheer perversity and temperament, she will gamble everything and lose.”
These beliefs, these criticisms comfort us by cutting off obviously disordered behavior from the rest of our reality. See that neon-lit corner over there? This is where some degenerates rely on luck to determine their life’s path. We implore you to stay here, where our wealth and happiness are simply the product of our hard work.
But the lines cannot be drawn cleanly. Activities like investing and playing poker make explicit the interplay between skill and luck in our lives. To paraphrase poker player Ike Haxton, debating whether poker is a game of skill or a game of chance is like asking whether a big gray rock is bigger or grayer. Since game skill depends on understanding how the odds interact (and how opponents will consider the odds to interact), the two cannot be compared as separate qualities.
This is one of the reasons economic philosopher Ole Bjerg calls poker “parody of capitalism‘: ‘On the one hand, poker models the fundamental mechanisms of capitalism, and on the other hand, the game demonstrates that these mechanisms are not guided by efficiency, rationality, or even justice.’
I believe investors in particular have something to learn from poker. We seem uncomfortable admitting that the success of an investment depends largely on luck (you call my office a casino?!), so maybe the poker table serves as a sort of laboratory , a place of play where we can carry out experiments whose conclusions can be reused in the real world.
With that in mind, let me share four lessons from the poker table that made me a better investor.
Lesson 1: It’s not how good you are, it’s how bad your opponents are
In my early years as a top game, I got a lot better every week – which was easy, because I started off horribly. The weird thing is, the better I got, the more money I lost. I was terrible when I played with my friends, really bad when I played low stakes casino games, pretty bad when I played bigger underground games in New York, and only a bit bad when I played games in the high limit section of casinos.
Spot the problem?
In a way, my journey resembles that which professional investors have experienced over the past few decades. They developed better sources of information and perfected their methods – but also saw less skilled investors flee the game of stock picking. I’ll let Michael Mauboussin pick up the analogy in his brilliant 2017 note, ‘Looking for easy games‘:
Investors quickly shift their investment allocations from active to passive management. This trend has accelerated in recent years.Investors who leave active managers are likely to be less knowledgeable than those who stay. This equates to weak players leaving the poker table. Since winners need losers, this can make the market even more efficient, and therefore less attractive, for those left behind.
Lesson 2: It’s not how much you earn, it’s how much you take
I used to play a clandestine game in an Upper East Side doctor’s apartment. It was a cash game, which means you convert money into chips at the start (or during the game if you need more chips) and convert those chips back into money at the end. While it was a pretty big game, with thousands of dollars on the line at the end of the afternoon, it was relatively friendly and laid back. The host usually offered homemade prosciutto sandwiches, and the players discussed movies and politics during the game. Since it was by invitation only, we were a relatively tight-knit group.
One Sunday, some of the regulars had to travel, as the doctor invited several players from the Queens game where she sometimes played on another night. One of these players in particular impressed me with his fearless style. He played almost every hand dealt to him and bet big whenever an opponent showed the slightest weakness. His strategy worked for him and he amassed a huge stack at the end of the night. But I was able to enjoy her splatter tendencies in one or two places, so it was a good session for me too.
A few days later, I hosted another cash game in my own apartment, playing for smaller stakes with a handful of friends. We talked during the game about how one of those friends — call him Will — was heading to Las Vegas for a bachelor party the next day.
This weekend, Will called me from Vegas. As soon as he landed, he headed to the Bellagio and hit the roulette table. After losing his first $100, he slapped another Benjamin on the table. The dealer examined it and put it aside. The play has stopped. Will noticed that taller and taller men in suits seemed to gather around his table, whispering among themselves and looking in his direction. It was the head of the stand who finally spoke. “Sir, do you know that this note is a forgery?
Will didn’t know and said so. They took him aside. After repeatedly proclaiming that “It’s not Ocean’s Eleven!” (he was, he admitted to me, somewhat intoxicated) Will explained to me that he had received the bill during a poker game from a friend in New York. ‘What’s your friend’s name?’ Will was asked. On the phone, Will promised me that he answered with a pseudonym. Luckily for him, they took Will’s information, took the bill away, and that’s where the interaction ended.
Lesson? It’s not how much you earn, it’s how much you take. Winning a big hand and returning the winnings a minute later doesn’t help you. The same goes for buying real money and recovering hundreds of counterfeits. This may be a lesson that some investors who sat on big paper profits in high-interest crypto accounts have recently learned the hard way.
I always miss those prosciutto sandwiches.
Lesson 3: When you want to continue, it’s time to stop
It’s a feeling that every poker player has experienced. You’ve been playing for hours, you’re about to play and you lose a big pot. As a result, leaving as planned seems unfathomable. You want to keep going, play a few more hands, maybe get some of that money back. A huge force of gravity holds you to this table. There’s a reason why poker players who lose money get “stuck.”
I remember an eerily similar feeling when I tried options trading. My first few trades did not bear fruit, which should perhaps have indicated that I need to rethink my strategy. But instead, I took bigger bets that were based on less research, increasing the size and speed of my purchases. Something about losing money made me want to bet more money. Why? I was stuck.
I’ve often quoted George Soros saying, “If investing is fun, if you’re having fun, you’re probably not making money.” But we could go further and say that any strong emotion felt by an investor is a sign that something is wrong. If you’re having fun, or if you’re in the dumps – if you want to keep the good feeling or make the bad feeling go away – it’s probably time to get up from the table or the terminal.
Lesson 4: There is always another hand
The dealer occupies a strange role at the poker table. Their presence is an integral part of the game, of course, since they are the ones who throw the cards and control the action. (Is it an exaggeration to say that while poker is a metaphor for life, it serves as a substitute for silent, subtle god do we have to keep up with our modern times?) If an argument breaks out between two players, the dealer has the first and best chance to get the game back on track. The phrase they’re most likely to use contains just two words: “Next hand.”
In other words, stop discussing what happened in the last hand. We have another hand to play, so let’s go.
The lesson is easy for poker players to forget. We’ve all had the feeling of being “out of cards” – of not being given anything decent to play, and therefore resorting to hands we shouldn’t be playing. I only have a limited number of opportunities to play cards, you might think, so why not try to make the most of the bad hand dealt to me?
The flaw in this reasoning is that there is always another hand. The key to long-term survival in any gambling pursuit is not losing all of our money, so we can live to fight another day. If we go all-in with a bad hand (or even a good hand) now, we may not have the chance to capitalize on a better opportunity later.
The same applies to investing. No matter how good an opportunity, there’s always another stock, another fund, another event just around the corner. Sensing the urgency of an upcoming opportunity, we may be tempted to make the most of it and make the biggest bet possible. But we can’t forget that there’s always another hand that we haven’t even seen yet. If we go bankrupt now, we may never know the magnitude of the unseen opportunities we are giving up again.
But then again, if we go bankrupt, we could at least walk away with some hard-earned lessons that we pass on to other parts of our lives.