Arts Entertainments

Poker and the stock market

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 newest casino, the Borgata, where I stayed for the night. I don’t consider myself a gambler and I have never liked losing money at the tables. When I bet, 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 have enjoyed the game of poker and have only 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 the two 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 back-testing 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 odds that his stock will win or lose. Price goals and targets 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 odds 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 cycles and specific chart patterns because humans repeat their character actions and trends.

Now, back to the poker table; When I sat down and started playing, my first goal was to become familiar with the character traits of the players around me. With 10 players at the table, I had plenty of time to assess 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 on all other hands. He was very tense and nervous and folded his cards tightly when he was angry. The gentleman on the left was also playing high odds hands, but I saw him call some hands that were risky at lower odds. A gentleman across the table was the braggart and he always had a smile on his face with a pair of dark glasses. I challenged this man several times and paid to see his cards because I felt like 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 game of choice 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 wagering. 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 immediately cut my losses 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 odds of winning the hand are high, I can call or raise. A fourth and fifth card (the turn and river) are dealt on the table after the flop and betting continues on each round. Once again, I can decide if I would like to call, raise or cut my losses. The connection I am trying to make with investing in the stock market and playing poker relates directly to cutting losses (capital preservation and money management) and my odds 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 bucks to see the flop. The “no limit” aspect allows your upside potential to be unlimited, which translates into investments. If you shorten losses and take advantage of the winner, the upside potential of the investment can also be limitless, 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 put money into 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 to cut your losses and move on without mixing emotions in your decisions.

All poker investors and players bring emotions to the table, some people control them better while others employ better systems and understand 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 losses and get out of the game and wait for the next opportunity because they are always just around the corner.

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