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Learning From the Game: Poker and Personal Finance
Success at the poker table usually allows you to spend a fair bit of money buying toys.
But after you've got all the flat-screen TVs, iPods and laptops you could want, what's next?
Several experts with ties to both the financial and poker industries say poker players can always apply the tenants of good personal finance to come out ahead of the game.
And by following a few basic rules of thumb that apply to both poker and personal finance, poker players can make the transition to managing their own money more effectively.
Most players understand that having a long-term goal, such as moving up in stakes or winning a major tournament, can help a player focus and play better poker.
Jim Wang, the man behind the financial community at Bargaineering.com, says setting up a major financial goal to work towards is similarly key to staying motivated enough to do the hard work that goes into successfully managing your finances.
Just as important as those big goals, though, is having smaller ones to meet along the way.
If you're looking to buy a house, Wang says you'll want to focus on monthly savings goals so you can have a sense of accomplishment along the long path to buying your own home.
In poker and finance, there will always be days when things don't go your way.
Whether it's taking on sudden unexpected expenses due to a leaking roof or learning that your Toyota stock unexpectedly tanked when someone's Prius decided to run away, Wang says being able to look at your success in meeting small goals can help ease the pain of temporary setbacks by giving you perspective and keeping you focused on the long term.
Look for Value
One of the most fundamental aspects of winning poker is getting value out of your hands by getting your money in the pot when you're getting the right price.
If you're constantly calling pot-sized bets with flush draws, chances are you'll go broke pretty quickly.
But if you're tagging along when your opponents bet too small, you'll find yourself winning over the long run.
Wang says that concept translates directly to the financial world in the form of value investing, where you put your money into stocks that are underpriced compared to their book value.
For instance, if the book value of a company is $1 per share and it's currently trading for $.80 per share, generally speaking, that's where you want to put your money.
Looking for value is what allowed billionaire banker and world-class Limit Texas Hold'em ace Andy Beal to become one of a small handful of Americans to actually increase his net worth during the current recession.
By picking up what he recognized as underpriced assets during a market downturn, Beal was able to reap the benefits to the tune of more than $1 billion while everyone else was running scared.
Amy Calistri, the co-author of Check-Raising The Devil and editor of the StreetAuthority.com investment newsletter, who covered Beal's heads-up matches against Ted Forrest, says there's no difference between his strategy and what any non-billionaire investor can do by digging around and looking for the kind of deals that others may pass up.
Do the Leg Work
While there are some poker savants who don't have to worry about things like reading up on poker strategy and reviewing their own play, for the rest, these can be the very foundation of long-term success in the game.
If you're putting in your time at the tables and staying sharp by constantly reviewing your play to fix your leaks, a solid win rate will follow.
Similarly, Calistri says investing is about more than just picking a stock and waiting for the price to go up. Time spent studying all the available data are what allow you to determine whether you're going to be getting good value.
Likewise, studying your results will help you to incorporate what you've learned from experience into refined strategies and experience is the difference between mediocre returns and true success.
"The same instincts that tell you whether a trade is going to be good are the same instincts that tell you whether your hand is good or bad," says Dan Shak, a hedge fund manager by day and tournament poker champion by night. "It's a feeling that says, ‘I've been here before, I've felt like this before, this is what happened before.'"
In another parallel with poker, Calistri says the Internet has made becoming a successful investor much easier than it used to be, simply because there's so much information out there to help you learn and make good decisions.
"Mom and pop investors can get access to all the SEC reports that every company files, and they can go through detailed statistics," she said. "There's much more information out there than there was even five or ten years ago. Sites that do detailed calculations for you, or compare companies - those just didn't exist before."
Once a strategy is developed, the need to stay disciplined is important in poker and investing.
Shak says getting too emotional can lead to making bad decisions, which in turn can lead to going broke.
"I try to keep my highs not too high and my lows not too low," he said, of both poker and running a hedge fund. "I just assume that successes are temporary. I never take anything for granted."
That realism means even though Shak cashed in the first five major events he played this year, including a January heads-up win over Phil Ivey in the Aussie Millions $100,000 Challenge, he doesn't assume he's going to continue cashing at the same pace.
"I know that the chance of making the money in any event is generally 10 percent," he says. "So even if I cash in five tournaments in a row, I still have a 10 percent chance for the next one."
Discipline is also as important when it comes to your own finances, says Wang.
Diversifying your investments can work like bankroll management does in poker, by limiting the effects of variance and keeping a downswing in one investment from affecting your entire portfolio.
And much like poker, early success can sometimes be a bigger long term problem than early failure, if you lose your discipline and develop bad habits as a result.
"Every investor thought they were a genius in the mid-to-late 1990s with all the tech stocks going up, like an online poker player who starts off on a lucky streak and doesn't recognize it for what it is," said Calistri.
Only by keeping a critical eye on your results can you avoid making those kind of mistakes and by continuing to do the legwork necessary for making good investment decisions, Calistri says you are more likely to repeat your successes.
Plus, even when you fail - and just like in poker, there will be moments of failure - you can learn from your experience and improve your future results.