Poker, Investing, and Knowing Your Edge

By Hayhoe Team
February 8, 2019

Poker and investing—two sides of the same coin or completely different? Given the volatility in the market in the short term, it sure seems like “investing” is just gambling in disguise. Most of the time, market moves don’t seem to make much sense and it just seems like pure luck if something goes our way. But like professional poker players, there is truly an edge to be had for those investors who are willing to do the hard work.

When you think of poker and investing, the first thing that comes to mind is that classic Kenny Rogers song, The Gambler: “You gotta know when to hold ’em, know when to fold ’em, know when to walk away, and know when to run.” How applicable is that to investing? Think of the investments you currently own. Do you know which ones to hold and which ones to fold?  

Ray Dalio (manager of the world’s largest hedge fund) has a great comment about this: “The nature of investing is that a very small percentage of the people take money, essentially, in that poker game, away from other people who don’t know when prices go up whether that means it’s a good investment, or if it’s a more expensive investment. Too many investors are reactive decision-makers. If something has gone up, they say, ‘Ah, that’s a good investment.’ They don’t say, ‘That’s more expensive.’”*

Think of your investments. Do you know their “true or intrinsic value”? If something goes up, do you know if it is still a good investment or if it just got more expensive? Ray continues on: “If you’re going to come to the poker table, you’re going to have to beat me…We have 1,500 people who work at Bridgewater. We spend hundreds of millions of dollars on research and so on; we’ve been doing this for 37 years.”* Think of that the next time you get the urge to buy a stock on a whim. Who’s selling it to you? What do they know that you don’t?

Does this mean you should give up investing and just put your money in the bank or index funds? Maybe! If you are not willing to put in the hard work of knowing what you own and why you own it, there could be some guy named “Ray” on the other side of your trade chuckling to himself as he sells you his stock.

Maybe not though if you have a plan and can identify your edge. The first key is to have a plan and stick with it. If you are going to abandon the course as soon as the cards go against you, then don’t play the game. As Socrates said 2,500 years ago, “Know thyself.” Know what sort of investor you are. If volatility is going to shake you out of your investment plan, then either change your plan or do something to mitigate it. Don’t go in just hoping things will work out.

Finally, identify your edge. What could that be? There are a few that can be exploited, but I’m out of space so they will have to wait until next month. Until then…

Mike Hayhoe, Senior Investment Advisor, Hayhoe Team—Mandeville Private Client Inc. 

*From the article “Ray Dalio Uses A Perfect Poker Analogy To Explain The Biggest Mistake Investors Make” by Matthew Boesler:

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