I love playing poker. I’m not as good as I’d like to be, but I’m good enough to know many of the mistakes I’m making. Discipline in poker means I don’t play bad cards. I’m patient. With investing and trading, the same goes, observes Marc Lichtenfeld, chief income strategist at Wealthy Retirement.
With my wife out of town recently, I spent a lot of my free time at the tables, both in person and online. It was a rare weekend where I won every session. What I was most proud of was that I won even though I didn’t always have good cards, especially when I played live.
How’d I do it? By playing the same way I invest. I’m very disciplined, but I occasionally take a big swing when I believe the odds are in my favor. I’ll fold hand after hand if I’m not getting good cards and there isn’t the right opportunity to bluff. I know from experience that when I’m undisciplined, I lose my money – usually quickly.
With investing and trading, the same goes. I use stops to ensure that a small loss doesn’t become a big, devastating loss – and that a nice win doesn’t become a loser.
At the poker table, the gentleman to my right lost all his chips. He pulled out a wad of cash an inch thick and peeled off another hundred in order to buy more chips. I saw him repeat that several times.
I never – and I mean never – do that. In fact, I don’t even bring enough cash to go back into my pocket in case I’m tempted.
Before I get in the car, I make a rational decision (before emotions take over) about the maximum I’m willing to risk. And that’s what I start with. If I lose it all, I won’t lose any more than I was comfortable risking. That’s what a stop will do for you in investing.
Poker is also a lesson in position sizing. The Oxford Club recommends that you never put more than 4% of your portfolio into any one position. That way, if you suffer a 25% loss on a stock (which is where we traditionally set our stops), you’ve only lost 1% of your entire portfolio, which is easy to bounce back from.
Making and losing money is often an emotional experience. Make decisions about stops and position sizing before you put any money at risk. Your outcomes will be better, and when things do sometimes go against you, it won’t be as traumatic – financially or emotionally.
