Poker… Preparing You for the Real World ?!

I usually post here about all the problems playing poker can cause … loss of time, $$, balanced life, etc.  Well, to be fair, I came across an article in a financial magazine that says playing poker can make you the next Wall Street wizard.  Well, almost.

Aaron Brown, at Morgan Stanley on Wall Street, is the author of The Poker Face of Wall Street.  He thinks the tricky part of investing isn’t finding good stocks or mutual funds – that’s fairly straight forward.

The hard part, he thinks, is the psychological side of investing.  But, poker can come to your rescue!!  He says that poker players learn about taking risks, when to pull out and when to stay in, and the level of aggressiveness they’re comfortable with.

For example, blue-chip investing is pretty safe, like “betting only when you have a royal flush.”  You’ll make some money reliably, but without a lot of excitement and probably not big $$ rewards.

Looking for stocks that are out-of-favor but can rebound, the “contrarian” approach, is like “playing lots of hands, even weak ones.”  But you need to fold if the cards, or stocks, go against you.  The potential is there for the stock going way up, sort of like a great bluff with bad cards, or having great cards but no one else at the table thinks you do.

Any investors out there with a comment??

…I wonder if Mr. Brown is up at 3am playing “just one more hand” ???

10 thoughts on “Poker… Preparing You for the Real World ?!

  1. The big difference is that when you take a value or contrarian approach to investing, you effectively *have a reason* for thinking that the company is worth more than it is priced.

    In other words, you buy a cheap stock when its company meets the following conditions:

    1. Strong management
    2. Strong cash flow
    3. Strong return on equity (uses its resources well)
    4. Strong business plan over 5 years

    I’m fairly sure that such information isn’t available to the person who plays weak hands in poker.

  2. Cowboy names some conditions above that would lead one to expect a stock might “turn around,” and thus be worth the risk of investing in.

    I wonder if these would be rough equivalents in poker… you know that you bluff really well, or that your table mate is always “irrationally exuberate” about his hands, leading him to over-bid. You then would have information that would give your poor hand a chance to “turn around.”

    It is true that this information you have is more about your skills, rather than something intrinsic in your hand (the stock), but are reasons you might bet (invest) in a problematic hand (stock).

    Interesting idea, tho I haven’t read the book.

  3. I agree with Brown’s point. Poker can teach alot about investing and tolerating life’s risks in general. In order to receive these lessons, though, you have to be in the proper frame of mind, which I suppose is one of the lessons. You need to try, and it is not as easy as it is to write here, to divorce emotion from the process. You need to focus on the process more than the results. Lastly, you’ve got to have enormous patience, what the oldtimers called “a leather ass”. There’s diminishing returns to poker’s lessons, however. Four or five hours a month should satiate.

    I haven’t read Brown’s book but I like his Wilmott columns and I note that Taleb and Thorp have both given it the thumbs up.

    As an aside, I think televised poker has negative educational value.

  4. Quietstorm, your approach are very Hindu/Buddist. Am in the middle of an article on chronic pain management and the concept of Hindu acceptance. Do you practice this from a religious/spiritual perspective?

  5. I don’t know Hinduism or Buddhism and therefore don’t practice them intentionally. Patience is a struggle for me but by acknowledging its difficulty, I’m able to be manage it to an extent.

  6. Thanks for the plug of my book.

    Cowboy is taking me too literally. I agree the analysis process by which you select a good contrarian investment and the right time to play a weak starting hand in poker are totally different. But the psychological and strategic requirements for managing contrarian investments and playing weak hands in poker are similar.

    Actually, the investment criteria you mention are more typical of what I call value investing rather than contrarian. You’re buying the stock because (a) you think the company is good, and (b) because it is priced at less than its value. I consider that similar to playing strong but vulnerable starting poker hands, like low pairs in hold’em.

    The most common preventable cause of bad investment performance, in my opinion, is failure to think the entire process through from the beginning. People embark on courses that either cannot succeed, or that they don’t have the psychological stamina to steer to conclusion. The same thing is true, of course, of bad poker players.

  7. As we all know, in both the poker and stock market investing, we are playing the expected values. It is relatively easy to calculate the expected value for any circumstance in poker play. But it is very hard to do that for some(or any) circumstances in stock investing(of course we just need to be roughly right in the calculation of the expected value). I was hoping to find out more information on how to calculate the expected value of a stock investing in Aron’s book, but I didn’t find that.

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