Poker is game of Odds and probability so is investing in Stocks. It teaches you to be patient to wait for the right cards. You need to evaluate the odds of you winning with addition of every new cards in form of community cards. It teaches about allocation of resources on basis of Odds and Probability. There are lot of parallels between Poker and Investing, below are some of them
1. Strong Hand (Business):-
To begin with you need a strong hand with good odds of winning to be in the game, or you fold and wait for strong hand.
In investing also you need to Invest in stocks of business which are strong in their domain and have better odds of performing well in the long run.
2. Community Cards (Macros):-
Even if you start with strong hand there are slew of community cards which comes in picture with flop, turn and river. At each phase we need to evaluate our odds, what would be the payout given the pot size.
In same way in markets there is ever evolving macros Interest rate cycle, competition, Raw Material Price, Duties etc, at each stage we need to evaluate if we still have good odds and what are the odds w.r.t other portfolio stocks. Unlike poker we have multiple stocks which we are invested at any given time. We should be assess the situation from Portfolio point of view as well.
3. Chip Leaders remain Chip Leader for long time (Market Leader)
I have seen that a dominant chip leader remains so for long period of time and has some sort of advantage. Given the dominant nature the leader is able to play more hands without impacting his stack in big way and sometimes can intimidate small players out of the game.
In business also Market leader remain so for long periods of time. They have volume power, money power, network effect to weed out the smaller players and hence make them more powerful.
4. Control your emotions & Wait it Out for good hand (Valuations)
The chips are the ammunition by which you are going to win big, good hand with smaller amount will not win you much. So you need to wait for good hands and swing hard when it arrives.
In markets also you need to wait for right valuations as you must be already aware of good stocks and market leaders. You need to wait for right valuations according to your time horizon and when Mr. Market gives you that opportunity you need to swing hard.
5. All In when you are Sure that probability of winning is very high (Allocation)
There are hands when you know there is no chance you could loose, this are the hands you should go All In.
In stock investment your best business should have high allocation. Top 3-5 ideas should have 50-60% allocation.
Being right alone is not enough, you need to be right and with huge allocation to make a difference on returns at portfolio level.
6. You need to re-raise when odds are high (Add to winners)
When the odds are high and you get the chance to re-raise you should do it, to increase the payoff.
Similarly when you have discovered a good business and are invested in it and is going to remain great for long run you need to add to the existing position to get a good payoff.
7. Know when to Fold (Selling)
There are times when you start with strong hand and have invested lot of money in that hand but the odds have changed for worse on River card and the player opposite you has come All In. You need to consider your odds and make sure you playing the hand and money invested has not say in your final decision. Don’t be victim of Sunk Cost Fallacy.
You need to take a call based on current situation and if the odds have deteriorated its wise decision to Fold and fight another battle.
Same with stocks and business we need to know when to sell, we should make decisions based on current evidence and not get anchored to our initial thesis. If need be we should take the loss and wait for another chance in market.
To sum it up we need to find business which have good odds to succeed, are market leaders, get stronger when macro don’t favor and flourish even further when macros are in Favor. As an investor when we get such business at right valuation we should have high portfolio allocation and over course of period when markets gives us chance we should add to existing position.
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