Trading Takeaways From Texas Hold ’em

Playing Poker

I’ll never make my living as a hold ‘em poker player.  I tend to focus too much on my own cards (sometimes I look at my hole cards two or three times during the course of a hand), I’m too stuck in my own head to read my opponents, and I tend to let emotions dictate my decisions.  All that said, I still like to play… every once in a while.

I’ll also never make my living playing the stock market.  I’d be a nervous wreck.  I tend to focus too much on the day-to-day stock price (I would look at my stocks 20 or 30 times a day), I spend more time second-guessing myself than reading financial reports, and I tend to let emotions dictate my decisions.  All that said, I still like to play… a little bit.

So, I’ve developed a strategy that works well for me when I do dabble in trading the market, for fun, and it’s tied to the same strategy that worked for me the rare times I managed to win at the poker table.  I’m not advocating it as a strategy.  This is just a look into how I think about stocks.  Here are three trading take-aways from playing Texas Hold ‘em:

I am the short-stack.  I know.  That’s not exciting at all.  If you’re going to gamble, gamble.  But, I don’t like to gamble with money I can’t afford to lose.

Besides, believe it or not, all of the really successful sessions I had playing poker started with me on the short-stack of chips, risking minimal money.  It has to do with psychology.  Risking money that I can easily afford to lose does a couple of things for me.  It allows me to loosen up my game just enough so I’m not playing scared.  That allows me to take the necessary risks and fully commit when the odds turn enough in my favor.  It also gives me permission to listen to my gut and not over think things.

At the same time (weirdly), playing short-stacked keeps me from being reckless.  After all, I don’t want to lose it all right away and I want to save my fire-power for the really big hands.  It forces me to pick my spots for the chance to double or triple up.  If I do take down a big pot, I can try to roll that into even bigger gains, knowing all the while I’ve barely risked anything.

This is how I trade individual stocks.  Most of our money is sitting safely on the sidelines in savings, IRAs and low-cost index funds from Vanguard.  I can’t stress how important it is that I pick individual stocks with only a small part of our overall portfolio, money that we don’t even think twice about.  I start out with a short-stack so I can feel completely comfortable being aggressive when I need to be.  If I make some big gains, maybe I’ll roll that house money into a chance for even bigger gains.  Or maybe I’ll stash it in our ETFs and continue to play the stock-picking game with a short-stack.  This may never be an approach that will get us fabulously wealthy, but it has padded our portfolio just a little bit so far.

I bury the rake in no-limit upside.  I prefer to play no-limit poker especially when playing with a short-stack.  No-limit poker allows you to shove all your chips into the pot if you think you have the best hand.  Limit poker, on the other hand, caps your bet on any given hand.

Here’s why that’s important.  Like everything in life, poker has fees.  It’s called the rake, a seemingly insignificant part of the pot that the house takes to pay dealers and make a profit.  It seems insignificant, but it can seriously erode your stack over time.  And then there are the blinds (forced minimum bets that players take turns paying into the pot, whether they like the hand they’ve been dealt or not).  With no-limit poker, I have a better chance of scoring big before my stack get whittled down by forced fees from the house.

The same goes for individual stocks.  Because I’m trading with a minimal amount of money, brokerage fees come into play.  I’m not going to waste limited resources on stodgy old blue-chip stocks with limited upside.  And I’m not looking to spread risk over several stocks to expose myself to more fees.  One or two stocks is the way to go with my trading strategy.  I’m looking for the “no-limit” upside with my picks, typically in the form of unloved and volatile small-caps that have the chance to run as momentum stocks.

I don’t get fancy.  Do you remember what I said at the beginning about my tendency to second-guess myself at the poker table?  The best way to curb that for me is to keep things as simple as possible and to be as sure about the situation I’m getting into as possible.

I’m not going to triple-barrel bluff with 7-2 off-suit while using double-reverse psychology to chase someone off a better hand.  Trust me. That’s a complex strategy.  You really have to know what you’re doing, and I just can’t read people that well.  No, I’ll go all-in with a set of aces at the turn when I know I’m ahead (see my illustration up above).  I could still lose the hand if the guy draws a flush on the river, but I’ve got another out with the full house.  That’s a simple set-up for the type of poker player I am.

I keep it simple with stocks in the same way.  I’m not a chartist, so I don’t worry about MACD, RSI or head and shoulders patterns.  I don’t know anything about biotechnology, so I don’t keep track of product in the pipeline and where they are with the FDA.  All of that just clouds my judgement and causes me to second-guess.

I trade stocks that I can understand and there are plenty of them.  I can easily understand the business models of restaurants like Shake Shack (SHAK).  Sell more burgers.  I can understand their key differentiators.  One of them has to be that they make excellent shakes, right?  And I understand the underlying trends that affect their business.  Do Americans still like good, greasy burgers?  I do a good amount of research well beyond that before pulling the trigger on a trade, but if I can’t easily call out those three things about a company at a glance, I likely won’t bother digging deeper.

I am not a day trader.  Day trading is not what this article is about.  It works for some, but like I said, I can’t read charts.  The kind of trading I’m talking about here is considered long-term for those folks.  I buy stocks of what I believe to be good companies, that the market doesn’t believe in.  I try to catch them close to their bottom with a goal of 50 percent upside in 6-12 months.  I plan to write an article later this week that goes a little more in-depth where I’ll introduce a portfolio I’ve started to test the strategy.  It will be fun to track its success (or failure) over time.

I am not an investment advisor. These are my opinions.  Please do your own research when considering whether or not to invest in individual stocks. 

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