If you’ve listened to a lot of interviews with successful investors and entrepreneurs, you might notice that a lot of them play poker, and some of them even recommend it as a way of improving financial acumen. There are many reasons: poker is a game of incomplete information, you have to assess risk quickly, be decisive, and emotionally deal with the consequences of a decision, whether it turns out to be good, bad or unknown.
A lot of people tell me that they’re thinking of getting into Bitcoin or crypto assets in general. They’ve got a few $1000 in savings, and they’re going to put it all in.
One question I like to ask them is, have you ever been seated at a card table, with $1000 in front of you, not knowing if you’ll walk out with your pockets full or empty? Most of the time, the answer is no, and I like to point out how that should be a hint for them about how well they’ll be able to handle the swings of the market.
Scroll down to the bottom of the post to watch and listen to the episode. In this episode, I present five key ways in which investing is like a game of poker:
1. Bankroll management/Asset allocation
Managing a bankroll is something that few cardplayers master – it’s common to hear even the best players going bust at some stage in their career. It’s common to find risk-averse gamblers, who stick to playing $2 games online, never wanting to risk too much. It’s also common to find risk-inclined gamblers, putting their rent money on the table in the casino.
Risk-averse investors might put all their money into term deposits, CDs and bonds, and they will lose over time, letting inflation eat away their savings. Risk-inclined investors might take out a mortgage and put the money on a penny stock, and it might pay off – then again, it might not.
What we want to do is seek a balance – risk enough that we stand to get a good return, but not enough that any one decision can send us broke. Don’t gamble more than you can afford to lose – but assess carefully what you can afford to lose. Reading about the Kelly Criterion can give you a more thorough understanding of how much to bet.
2. Sixth street – Being aware of deception
“Sixth street” is a term coined by poker player and writer Tommy Angelo about the events which happen after a hand – posturing, lying, perception management. Some of the best poker players use manipulation techniques such as “strange loops” – statements which, whether you assume they’re true, or assume they’re false, will be equally misleading.
Likewise, in markets we have examples where big players will attempt to manipulate the market under the guise of stating their opinion. One case was where Jamie Dimon, CEO of JP Morgan, opined publicly about how awful Bitcoin was, and how stupid people would get what they deserved if they bought it. Months later, it turned out that JP Morgan was purchasing Bitcoin, and Dimon decided to recant his position, saying there might be something to this crypto thing after all.
The lesson is, don’t trust what people say at the poker table, and don’t trust what big players say in the market.
3. Information asymmetry
A basic card player only has a few data in his mind while deciding whether to call, fold or raise. He knows his cards, the cards on the table, the last action, and whether he likes his hand or not. A solid player, however, has a personality profile of each player at the table, knows their betting habits, has an idea of their emotional state – and his own emotional state. He knows the chance he has to get the last card of his flush, the odds the pot is offering him, and his history with his opponent. This is the reason that a good player will beat a bad player in the long run – he knows more, and he knows how to prioritise the information.
Same idea in the markets – the average investor has heard a rumour, or he likes the logo of the project, or he saw that it went up over the last two weeks. The solid investor can take his time, looking at the commits on GitHub, reading about the history of the team, learning about their vision, and perhaps even talk to the team directly. This is why speculating is a superior form of gambling – you can take your time and literally learn a hundred times more than the average speculator. The more you know, the more likely you are to make money in the long term.
4. Let your stake match your knowledge
This is a simple rule of thumb to help you decide how much to invest. If you’re an absolute beginner at poker, knowing little more than the rules, you wouldn’t walk into a casino and put a month’s salary on the table. It’s the same with markets – it doesn’t make sense to dump thousands of dollars into a project when you only have an hour’s worth of knowledge.
The problem with this rule is, at some point with crypto assets, they could explode in price, and suddenly you’re holding more money than you know what to do with. That’s what is called “a high quality problem”, and that leads to my next point.
5. Plan your hand
It’s common to see bad poker players get into positions where they don’t know what to do, where they’ve put hundreds of dollars in the middle, and now they have hundreds more at risk. They didn’t decide before the hand what they wanted to do against a particular player, and now they’re caught out.
You can read countless stories of lottery winners who hit the big one, and then start spending their money on ridiculous excesses. For many of these people, the lottery might have been their retirement plan – but they never thought about it beyond “Step 1: Win the lottery.” If you have a plan, any kind of plan, of what to do when your investments jump in their rockets and set a course for the moon, that will remove a lot of stress from your life.
Don’t make the mistake of thinking money will solve your problems – it will not. It will only grant you different problems – problems you can start solving ahead of time, today.
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