How is Texas Hold’em Poker Similar to Investing? Part 2

Poker_TablePart 1 of this post series introduced the concept of similarities between poker and investing.  It then proceeded to describe 5 key areas of similarity.  Part 2 now goes on to explain an additional 5 key elements where both fields share characteristics.

6. Unavoidable Expenses: Investing and Poker both have unavoidable expenses associated with playing.

In Texas Hold’em poker the obvious expense is that of the “blinds”.  For 2 games, in each full set of games around a table, each player has to put up a certain bet amount before seeing any cards.  Therefore, even doing nothing has a cost in poker.  This is the cost of being in the game.

However, in poker there are other costs that are more hidden.  The cost of getting to a casino if you’re playing in a bricks and mortar session, or the cost of getting the appropriate software and hardware to be able to play online (assuming that this is legal).

The obvious cost for investors is the commission paid upon entry and exit from an investment or trade.  These costs have dropped dramatically even for retail investors, but they are still expensive in the context of realistic return targets.  For example a standard medium-risk return strategy would look to achieve 10-12% annualized returns.  If an investor is incurring combined entry and exit costs of 1% per investment, the investor requires gross returns of 11.5-13.5% to achieve net returns at the target level.

Another, more hidden cost for investors is that of acquiring information.  Although basic pricing and news services are free (e.g., Yahoo Finance), if an investor is serious about making money, it would be necessary to pay for more targeted and up-to-date news and pricing services.  Further, even if the information is free, there is a time cost involved. So, to get in the game one must ante up with commissions and information costs.

7. Performance Analysis is Vital

Both poker and investing lend themselves well to performance analysis. At the end of each game and investment trade you will have a number of statistics about what happened.  Analyzing these performance statistics is essential to identify problems with strategy and to help improve results over time.  Unfortunately both poker players and investors tend to neglect this element of their respective fields. As a result, they experience continuous losses and no improvement.

Both fields often cause the player to learn more from losses than gains.  Therefore, although losses are painful, since they cannot be avoided they do provide the benefit of a learning opportunity.

In Texas Hold’em poker there are three main sets of statistics which need to be analyzed.  These statistics must be collated and analzsed both individually and collectively to ensure that a player has a full understanding of all aspects of gameplay and bankroll management over time:

  • Game statistics show betting patterns based on the pocket cards, table cards, and the betting of opponents;
  • Session statistics are the aggregated game and bankroll statistics of each session, which demonstrate how game statistics change during the course of a session and how bankroll risk is managed; and,
  • Bankroll statistics demonstrate the progress of your bankroll over time in terms of changes to total size and the amounts put at risk relative to the types of limits played.

Similar to Texas Hold’em, investing has different sets of statistics for each element of the investment process:

  • Screening statistics are often overlooked statistics for investment professionals and warrants a separate discussion here.  Its analogy in Texas Hold’em poker is the percentage of pocket cards played out of total hands dealt.  Because this is an explicit part of Texas Hold’em, it is easy to measure.  But investors on the other hand rarely give consideration to how many times they trade compared with the amount of trades they evaluated.  Overtrading, a problem that affects many investors, starts at this stage and monitoring this statistic can help reduce it;
  • Individual Investment statistics show the trade size, holding period, change in position size during the investment, and exit data including returns;
  • Portfolio statistics provide details of the aggregated investments across a portfolio over a selected period of time to identify trends in the aggregated individual investment statistics; and,
  • Capital Management statistics demonstrate the changes in your overall capital over time based on the investments made.  The statistics that must be analyzed are mainly based around the volatility of the change in capital levels and the reasons behind the volatility.

8. Constant Risk Management: Risk management is necessary at various different levels in both poker and investing, and the levels are similar to the types of statistics discussed in the previous section.

In Texas Hold’em the player needs to first manage overall bankroll risk by ensuring that the bankroll is of sufficient size relative to the target limit levels being played.  Then session risk needs to be managed — in particular to focus on avoiding going on tilt in response to poor results.  Finally, game risk must be managed based on how the cards evolve and in relation to the amount of your money in the pot and what is required to stay in the game relative to the game situation.

Investors need to manage their overall capital in relation to the trade sizes.  The risk needs to be managed for each investment based on the amount of capital invested and how the trade performance has played out relative to the original investment thesis.

9. Emotional Control: When poker players and investors are subjected to the strains of monetary losses, profitable gains, and volatility of their accumulated capital, it is inevitable that emotions will run high … unless you have some Vulcan in you.

Therefore, developing your ability to control emotions in the face of such a financial rollercoaster is one of the core elements of being a successful investor and poker player.  Losing emotional control, particularly when results are going against you, is often devastating for your overall return levels.  The term used for this loss of control in Texas Hold’em is “going on tilt” where typically the player starts making more bets than is rational based on actual cards in an effort to recoup losses.

It is true that certain individuals have a better psychological disposition to deal with the emotional rigors of poker and investing.  Despite different emotional dispositions it should be possible for the majority of people to acquire the emotional control necessary to achieve success.  However, there is only one effective way to develop this control,  and that is by actually playing poker or investing with real money.  Only then can a person find out what emotional responses actually occur in response to wins and losses.  Following the discovery of this emotional feedback, the player or investor can start to work on controlling the urges effectively.

10. Discipline

This is probably the most critical similarity between Texas Holdem and investing. It is intertwined with all of the previous points raised.  Discipline needs to be maintained from the start of playing poker and investing to maximize the likelihood of success.  Like emotional control, discipline may need to be acquired because not everyone has it to start with.

It takes discipline to get through all of the issues above, ploughing a solo furrow, developing a business plan, maintaining a serious approach, dealing with the vagaries of luck, learning probability, managing expenses, collecting and analyzing performance data, managing risk on an ongoing basis, and controlling your emotions.


The comparisons between Texas Hold’em poker and investing discussed in these posts produce a compelling rationale for using poker as a tool to help improve an investor’s skill set. Learning the skills that are required to be a good Texas Hold’em player can help to increase your understanding of how to invest sensibly, profitably, and with low risk levels.

To read Part 1 of this series, click here. This post was originally posted at Texas Holdem Investing on September 9, 2009.

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