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Texas Hold’em poker has become a craze.
Thousands of players compete in tournaments with the winner
receiving a million dollars or more. Just like in the stock market,
though, it’s the professional players that win the game and profit
from the inexperience of the amateurs. Investors can learn much from
these professional card sharks.
I admit to having pre-conceived notions about poker and gambling in
general. I assumed that winning was just a matter of luck and
chance. It seemed to me that gamblers played the game fast and
loose, making decisions by the seat of their pants. Many investors
have the same pre-conceived notions about the stock market.
Yet, professional poker players don’t rely on luck to win. Quite the
opposite. Poker is all about probabilities and they’ve spent
countless hours learning and memorizing them. Armed with that
knowledge, they estimate what cards are held by another player, what
cards are needed to win the hand and, based on the cards they
currently have, their probability of winning. Professional investors
do the same thing. A professional investor looks for opportunities
where the odds are in his/her favor.
Great poker players are students of the game. They know the rules
inside and out, and how to use those rules to their advantage.
Likewise, successful investors need to have a basic understanding of
how the markets work, what causes stocks to go up and down and the
various strategies that can be used to find opportunities for
profit.
Poker is a psychological game. The professionals have trained
themselves to keep their emotions in check. They go to great lengths
to keep their opponent from knowing the quality of their hand. They
wear hats, jackets or sunglasses to hide these ‘tells’. At the same
time, they want to put psychological pressure on their opponent in
hopes of getting them to make a mistake.
Investing is also a psychological game. You can’t trust your
emotional reactions. You can’t make decisions based on fear or
greed. Both will end up causing you to lose money and leave the game
defeated.
Poker players know it’s a numbers game. In each hand they play, they
calculate their odds of winning and only proceed when the odds are
in their favor. They don’t expect to win every hand. They train
themselves to not let a loss of one hand affect how they play the
next hand. They’re willing to endure short-term losses so they can
win the tournament in the long run.
Successful investing is a numbers game, too. Professionals don’t
overreact every time the market has a few bad days and they lose
money, nor do they get overconfident when they have some great days
and make money. They do their research and put their money where
they know the odds are in their favor. They don’t blindly chase the
latest fad or hot tip. They don’t invest based on gut feelings.
Successful investors manage their investments. They don’t just
‘let’em ride’. Great poker players know when to cut their losses.
They don’t get suckered into throwing good money after bad. As the
hand progresses and the subsequent cards aren’t in their favor,
they’ll quickly fold, even if they have thousands of dollars in the
pot. Successful investors do the same.
Successful investors also know to lock in their profits. When they
see an investment increase in value significantly, they take some
money off the table. They don’t ride an investment up just to ride
it all the way back down again. They take action to minimize their
loss on the one hand, and then take action to lock in their profit
on the other.
If you don’t have the time or desire to learn the investing game
then consider letting a professional manage your money. Don’t think,
though, that just because someone is a broker, has a fancy office or
lots of clients that they are a successful investor. Many times
they’re just a successful salesperson!
When you know the rules and play the odds, stock market investments
can be a great way to grow your wealth. When you don’t know what
you’re doing, though, it can be more like a roll of the dice.
Have a financial question? I’ll personally answer it. Go to
www.guardingyourwealth.com and click on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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