Wednesday, April 11, 2007

Everything I know about Investing I learned from Texas Hold'em

Ok ok. Its not entirely true. Lately I've been playing quite a bit of poker online. Although I've played cards for over 20 years (poker for many of them), I've just recently fallen back into poker. Just with fake money, but I've been doing rather well. I like poker quite a bit because of the social aspects as well as the mathematical aspects of it. Since I am naturally drawn to numbers, statistics, logic, etc, it is not a big shock that I find poker...Texas Hold'em in particular to be so much fun. But when it comes to keeping your mind sharp, especially when it comes to investing I find that Texas Hold'em does a great job:

-- Texas Hold'em Poker forces you to think quickly about your chances of winning the hand. Being quick-witted is a skill that is useful almost everywhere in life.

-- Texas Hold'em Poker forces you often to be patient and wait for the right opportunity. Players that don't do this are considered loose or live and will lose most (if not all) of their money over the long run. Investing is no different. Patience is critical.

-- Leverage vs. Accumulation Understanding the power of leverage when it comes to investing is similar to the number of chips you might have in front of you. A short stack is similar to a leveraged position where you must make every chip count. A large stack shows the value of having accumulated wealth -- you can use it as a weapon to accumulate even more.

-- Diversification vs Overdiversification: Picking more than one opportunity to put some money into is important in investing so that it is not all lost on one bad investment. But if you divide each dollar into 100 different investments, none of them will have enough money to grow into anything significant. A balance is critical when it comes to investing. Picking several of the best investments is likely the best strategy. In poker, its like putting up money to see the flop; its likely to cost you, but if you pick only the most choice hands to spend the chips on, you're going to be way ahead.

-- Guts: There's not much to explain here. When you know that there is a good opportunity and you have done your homework, you have to have the guts to pull the trigger and go "all in" on it. Because its better to have tried to go for it and have lost on a bad beat after you were confident that everything was right....than it is to be stuck watching the perfect opportunity pass you by because you were too chicken to jump on board.

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