As an investor, you are just like a poker player who has the best hand, but they are still not sure if they have the best hand. This is because the best hand may have the odds of losing if some unfavourable cards come up later.
Keep your Emotions in Check:
Here is the point, which, in my opinion, deserves more attention. One of the world’s best poker players, Daniel Negreanu, has said, “Having emotional stability and emotional control is key to both investing and poker.” The psychology pattern of both poker and stock market have a very similar approach. Sometimes, both investors and poker players often make emotional decisions instead of rational ones. This put both of them into greater risks.
Some investors are vulnerable to their own emotions as poker players. When poker players start winning or losing, they get overwhelmed and start playing aggressively even if they have moderate hole cards. They start losing their cools, which leads to irrational play and act impulsively.
Likewise, when the investors make correct decisions, and the investment goes up, they become so bold and overconfident that they start risking large amounts of money. No matter if it is stock trading or poker, emotional control is important for both the professions.
Importance of Bankroll Management:
Professional poker players know that poker is not only about playing your every hand well. But, it is also about the bad luck that does not wipe out your entire portfolio. When playing poker even though you have 75% of chances of winning, going all-in with your money means you have a 25% chance of losing.
The same concept applies in the stock market also. A smart investor will often expand their portfolio, rather than investing all the money in only one stock. They don’t put all their money into it, even though a stock has a 90% chance of generating revenue.
Decisions based on incomplete information:
What will happen in the future is uncertain, and decisions in both investing and poker have to be made on future predictions. Even if you have a premium hand in poker, you are required to make decisions on the basis of incomplete information. As you can never be 100% sure of your opponent cards and the community cards that are yet to be revealed, you must decide whether to bet, raise, call or fold.
Similar is the case with stock trading. Investing also involves decision-making in the presence of incomplete information. The future direction of stock prices, interest rate, and several other factors that impact returns on investment. Many of these can be evaluated, but in the end, they are just unknowable.
As decisions in poker and the stock market are based on incomplete information, the secret to success in them is to determine what is most likely to happen and decide on the basis of the most probable result.
Risk management skills:
Both stock trading and poker need risk management skills. Whether it is a game of poker or stock trading, your aim should be based on positive expected value (EV+) while trading or betting. You must understand how much to trade or bet, or how much money you are willing to afford to trade or play in a week or months. Making decisions on the basis of incomplete information is what works in the long run, to lose or win your money by investing in the stock market or playing poker.
When playing poker, you will often find yourself in situations where you are card dead and do not get any playable hands. The crucial takeaway here is not to behave emotionally and stick to the folding of your hands until you find a favourable position.
The same thing goes for the stock market also. There will be situations in which waiting for good chances, and sitting on money are better than rushing to a random one to invest the money. We all make emotional choices which we regret later, and even I am not an exception.
In several situations, I was so keen to invest that I did it in oversaturated markets just to lose a massive chunk of the investment later on. Such decisions will cause you to lead money, and poker players learn this thing very fast.
I usually play online poker free, and that helped me to develop patience and manage my emotions, leading to much better decisions as well as success in investing.
In a nutshell, the skill and psychology used in the game of poker and stock trading are very similar. In fact, investors should start looking towards professional poker players to gain information into what makes them so popular. Personally, playing online poker has helped me to develop skills that are needed for investing, and it can be helpful for you too in order to improve your decision.