Being an amazing texas hold’em player does not guarantee that you will be an expert in the stock market, and being a standout stock investor does not ensure that you will be successful in poker. What I do believe is that the mentality that people have in poker cross correlates with the mentality of how people invest in the stock market. If you can understand how to keep your composure during grueling games of texas hold’em, then you should have the mental capability to play the stock market effectively in any kind of environment.
Types of Players:
Poker Characteristics: Irrational, willing to play with any hand, and will pay a lot to see the turn and river
Stock market mentality: These people get a rush off of making big gambles, and also can be labeled as momentum investors. They forget about fundamentals and price valuations and rather ride momentum to make quick short-term capital gains. When they buy an investment and it proceeds to drop 5% below their purchased price, they get frustrated and sell or double up to make money quicker (being on tilt in poker lingo). Long-term investing one or two years down the road usually isn’t an option.
Poker Characteristics: Able to read other players, knows when to fold a hand even if it’s strong, and doesn’t run after a hand that is statistically hard to obtain
Stock market mentality: These people are very successful investors who have set price targets, and don’t invest on emotion. Instead they use company statistics, recent economic news, and current market conditions to decide whether to buy or sell. They may not make exorbitant amounts of money in the near term but they also won’t take huge losses on their investments because they’ve done their research and analyzed the cost-benefit of the situation.
Low Risk Takers
Poker Characteristics: Only hold onto ultra strong hands (like pairs, Ace/King, high suited connectors) and try to bait people all the way through the river
Stock market mentality: These investors take on very little risk, and have portfolios that mainly consist of high paying dividend stocks or a portfolio full of mutual funds. They take pride in knowing they will have a constant source of income and prefer not to have huge portfolio swings. Stocks with high P/E ratios and small cap companies are usually not part of their investment strategies. By only playing when they know they’ll probably win, they’ll miss a lot of opportunities by playing too fine and not exposing themselves to any high risk securities.
Poker Characteristics: Unable to bet effectively, unable to adapt to playing heads up after starting with a large poker group, and plays too many hands
Stock market mentality: These people shouldn’t even be in the stock market and should instead be experimenting with Virtual Stock Exchange to get their feet wet with imaginary money before using their actual hard earned dollars.
In the recent market turmoil, there exists two primary types of people. One type are people who are able to restrict their purchases, leave a chunk of money on the sideline for further market decreases, and buy when quality stocks are oversold. The other type are the people who get scared because their portfolios are going more into the red and cannot stand losing money and panics. When people panic, they either sell their quality stocks with good fundamentals, are too scared to get back into the market quickly (and will miss opportunities to recover losses), or buy more stock of their depreciated current assets just to cost average without thinking about why the stock went down in first place.
Next time you play the market, think of how you play poker and it may help your mentality in rough times and good times to help you make rational decisions.