People say I’m crazy doing what I’m doing,
Well they give me all kinds of warnings to save me from ruin,
When I say that I’m okay they look at me kind of strange,
Surely you’re not happy now you no longer play the game.
– John Lennon, “Watching the Wheels”
Why did I open with a John Lennon verse? Well it’s really good song. And I could easily substitute the third line with
When I say I play poker, they look at me kind of strange
The strange look is often accompanied by a sentence containing the words ‘luck’ and ‘gambling’. My retort “I don’t gamble. I make as series of ‘value’ investments”. The strange look continues.
I’m not sure my terminology is correct, but my sentiment is. Every action I take at the poker table is because I believe it has a positive expectation. That’s poker talk for it will make me money in the long run. When you make an investment you do so with the expectation of a positive return, that goes without saying. In one of my many mind expansion sessions (daydreaming), I started making other connections between what I do on the felt, and what my CFO (ha ha, CFO – that’d be me – Meg) does.
The obvious one is, of course, don’t gamble invest more than you are prepared to lose. Your investment has a positive expectation, your due diligence has shown you this, but in the event it goes pear-shaped, you don’t want it to break you. In the poker world this concept is known as bankroll management. Your bankroll dictates the maximum stakes you can play, while still being able to ride out the inevitable down swings (poker is about the long term). I recall (and still chuckle about) a student at a University of Canterbury PokerSoc tournament, stating, “I need to win this tournament to pay my rent”. Not the sort of thing a newish landlord, as I was back then, really wanted to hear.
Poker is a game of incomplete information. The only thing you know for sure at the outset, are the cards you hold. The state of the game in terms of known and implied information is constantly changing. I touched on due diligence – Peter Lynch (of One Up on Wall Street fame) is supposed to have remarked along the lines of ‘Investing without research is like playing poker without looking at your cards’. I don’t play poker without looking at my cards and I know my CFO doesn’t invest without adequate research and keeping a finger on the ongoing pulse (and adjusting accordingly (Lookin’ at you Harmoney)).
Balancing risk and reward. Making good decisions by assessing the risk (money you stand to lose) and your possible reward. What return am I being offered currently (pot odds) or potentially offered (implied odds) versus the likelihood of my hand winning? The maxim about risk versus reward (more of one leads to more of the other) is just as true in poker. To a point. Finding that point is key. When you are in a position of strength (literally as in last to act or have a mountain of chips), you can take on more risk, just as when you are young, you can take on more investment risk (time puts you in a stronger position).
Looking for opportunities. Regardless of the likelihood of your hand winning, you must be open to, and astute enough to recognise windows of opportunities. Given that the human element is significant in poker, can you turn a likely losing hand into a winner? Extract maximum value from a powerhouse hand? Or even manage to improve your holding with minimal cost and risk? Peer-to-Peer lending is an example of a relatively new investment opportunity. As more providers come on stream and we are in a position to put some spare money into these, they will get a critical analysis as per Harmoney, I’ve no doubt. Stay tuned.
Monitoring performance. When playing your ‘A game’ you will still occasionally lose. Even when you are doing the right things you can still lose the pot. Some short term bad results are irrelevant. What is important is that over time (and in poker that can be many thousands of hands) your results show that you are doing the right things, and if not, you are making appropriate adjustments. Monitoring, analysis and adjustment is ongoing as it should be for any investment venture.
Failure. You are going to fail a lot, getting better at poker. A lot. Experience is what you get just after you need it, after all! You have to learn to be dispassionate about it and treat it as a learning experience. Did I make the right decision? Did I miss an opportunity? Could I have done anything better? This can be hard in the short term, and you mustn’t let it consume you (called going ‘on tilt’ in poker). Sometimes you need to seek out those with more experience, or different perspectives to yourself to improve. Do it. Stand on the shoulders of giants as the saying goes.
That’s enough mind expansion for now and all the best wherever your next investment may be!