Investing And Poker, Be Great At Both

By Joe Ponzio on July 7, 2007  |  2 comments

On June 17, 2007, my brother won a World Series of Poker bracelet, nearly $600,000, and a spot in poker history. As my family and I watched the final table online (thanks to Bluff Magazine), I could not help but think about the amazing similarities between poker (in this case, Texas Hold'em) and investing.

Luck Or Skill?

Anyone who understands the true nature of poker or investing from a business perspective knows that you can not attribute long-term success to luck. Sure, on any given day you may lose money. Still, in the long-term, the people who consistently make the right decisions will make money, and the people who gamble too much will lose money.

In poker, every turn of the card is another chance to get lucky—or to not get unlucky. Similarly, in the markets, every second is a chance to watch your stock go up—or go down. On a card-by-card basis, poker is a game of luck. On a second-by-second basis, owning stocks is a game of luck.

Pocket Aces Versus Pocket Queens

In poker, if you look down at A-A, you will have no problem putting all of your money into the pot. A-A is the absolute best starting hand you can have in Texas Hold'em and, against an opponent with Q-Q, you are going to win the pot nearly 81% of the time. But that is only when you play A-A versus Q-Q literally thousands of times. Still, at any given time, A-A can lose to Q-Q—and all it takes is the turn of a card.

No professional, great poker player would ever tell you to fold A-A simply because you've lost with it in the past. Instead, they'll tell you to keep putting your money into the pot when you have the absolute best starting hand. Then, do it again. Then, again. Over the long-term, you will make money.

The Odds Of Getting Pocket Aces

Every time a poker player is dealt his two hole (or starting) cards, he dreams of looking down at A-A. But, the odds are against him—to the tune of 220 to 1. If you were to play millions of hands of Texas Hold'em, odds are that you would be dealt A-A only 0.45% of the time.

Why, then, do we look for pocket Aces every time we peer at our hole cards, knowing that the odds of finding Aces are less than 1%? Simple: Because our decision to put all of our money in is easy-to-understand and right. No matter what happens on that particular hand, we know that the right move is to get as much money in as possible, no matter what we are up against.

Hole Cards Aren't Enough

In Texas Hold'em, hole cards aren't enough—there are five more coming out that can completely change the nature of your hand. Two red Aces look awesome before the flop. Two red Aces looks terrible on the river when the board is K-K-Q-J-7 with four spades.

So, when do you put your money in with Aces? When you clearly have the best hand. You'd be nuts to put all your money into the pot when the hand plays out like in the scenario above. You'd be nuts not to when you are reraised for the rest of your money, preflop, in a cash game.

Pocket Aces In Investing

Wonderful businesses are the pocket Aces of the investing world. When wonderful businesses are selling at a discount to their true value, you have the opportunity to get pocket Aces preflop in a cash game. When the same wonderful businesses are overpriced, they are still pocket Aces, but the board doesn't look so good anymore.

And when you buy anything but a wonderful company, you are simply gambling with a bad hand...hoping to get lucky.

Here's Where They Differ

In poker, you can not sit back, fold every hand, and wait until you get pocket Aces. You'll quickly run out of money. While Wall Street wants you to believe the same about investing, it simply isn't true.

The long and short of it is: When it comes to investing, you can have pocket Aces every hand. You simply have to buy a wonderful business (pocket Aces) at a discount (preflop in a cash game). In the long run, you'll make money. Check out Part II of Investing And Poker, Be Great At Both.

Also Filed Under "How to Think About Investing"

• Just Because You Know The Value...
• When Should I Sell My Stock?
• Lessons From the Banking Meltdown
• The Graham And Dodd Method