Stock Trading and Poker Psychology

The Motley Fool is a highly respected financial advisory service. Its Nov. 12, 2012 report, “50 Unfortunate Truths about Investing,” contained points that can improve your poker.

3. Markets go through at least one big pullback a year, and one massive one every decade. Get used to it. It’s just what they do.”

Tweak the timing and replace “pullback” with “losing streak,” and you’ve got a poker truth: Losing streaks are inevitable. You must accept that you’ll have several short ones and an occasional long one.

One implication is that you may need a much larger bankroll than you have or believe you need. Many authorities have estimated the bankroll necessary to be nearly sure of survival, but hardly anyone believes them or plays within their suggested limits. They think, “I’ll have some short losing streaks, but can’t have one so long that it busts me.”

It’s the same optimism and overconfidence discussed in earlier columns. Keynes said it best for investors: “The market can remain irrational longer than you can remain solvent.” Many poker authorities insist that you can run bad until you’re broke.

Your chances of going broke are increased because losing streaks often become self-reinforcing. You lose the confidence and aggression needed to play your A-game, and your tougher opponents sense and exploit your vulnerability.

To protect yourself, play within your bankroll. If it drops too low for your current game, move to a smaller one. Unfortunately, most players lack the objectivity and humility to drop down. They can’t accept that they may have once had the bankroll and skill to beat their preferred game, but can’t beat it now.

So they stay in bigger games than they can handle and take ever-increasing losses. If those losses become too painful, they can go on tilt and blow everything.

11. Not a single person in the world knows what the market will do in the short run. End of story.

33. What markets do day to day is overwhelmingly driven by random chance. Ascribing explanations to short-term moves is like trying to explain lottery numbers.

Montier wrote in The Little Book of Behavioral Investing: “On any given day I can turn on the TV and find at least three channels filling my mind with in-depth analysis of what are near random fluctuations in the market… too much information leads us to feel overconfident in the extreme, but does little to aid us… we actually find useless information soothing, and we process it endlessly.”

This reaction is related to the illusion of control I discussed in an earlier column. Gamblers feel they’re controlling and improving their results by using information, even if it’s worthless. Casinos exploit this feeling by providing soothing, but useless information.

Roulette wheels have electric signs showing the last few results. Baccarat players are given scorecards to record equally meaningless data. This information has no predictive value, but it makes people feel better and gamble more.

Countless poker authorities have insisted that cards are random, period. You can’t do anything to change or predict them. Your own and everyone’s chances of getting pocket aces, making the next flush, or catching that two-outer are always identical.

Many, perhaps even most, players don’t really believe it (even if they say they do). Thinking that they, an opponent, or a seat is “hot,” “cold,” or “overdue,” causes countless foolish mistakes. To reduce these mistakes, accept that cards are random and base your decisions only on expected value (EV).

In addition, recognize and adjust to your opponents’ irrational feelings. If they’re afraid that you’re hot, bluff more. If they think they’re hot and are overplaying their hands, call and raise more.

5. Beginners should focus on avoiding mistakes, experts on making great moves.

This point is closely related to the optimism and overconfidence which I’ve repeatedly emphasized: Most players aren’t nearly as skilled as they believe. Instead of reducing mistakes by playing solid, textbook poker, they try advanced moves they can’t execute well and take unnecessary losses.

Even some experts should avoid being too “creative,” especially when others are watching them live or on television. Their need to show off causes some experts to make fancy plays that are much less profitable than straightforward ones. They may impress observers, but cause unnecessary losses.

12. The analyst who talks about his mistakes is the guy you want to listen to. Avoid the guy who doesn’t – his are much bigger.

One reason I have immense respect for Roy Cooke is that he admits his mistakes on these pages. It increases his credibility and helps our readers to admit their own mistakes. Admitting mistakes is the indispensable first step toward correcting them. When someone never admits a mistake, I wonder, what’s he hiding?

16. Warren Buffett’s best returns were achieved when markets were much less competitive. It’s doubtful anyone will ever match his 50-year record.

The same point applies to Johnny Moss, Doyle Brunson, Stu Ungar, and Johnny Chan. They won two or more WSOP main events, but the fields were much smaller and the players much weaker than they are today. Thanks to computer software, hundreds of books, thousands of articles, and millions of online hands, today’s players are much tougher than the ones the immortals defeated. I doubt that anyone will ever again win two WSOP main events.

25. Professional investing is one of the hardest careers to succeed at, but it has low barriers to entry and requires no credentials. That creates legions of “experts” who have no idea what they are doing. People forget this because it doesn’t apply to many fields.

The same could be said about playing poker professionally. It’s very hard to succeed, but anyone can say, “I’m a professional poker player.” Countless moderately skilled players (and a few fairly weak ones) turn pro, and they almost always fail. They generally make excuses such as, “My bankroll was too small,” or “I was terribly unlucky.” They rarely admit, “I’m not good enough.”

Even if you play expertly, you’ll fail unless you apply solid business principles. Many wannabes regard these principles as unnecessary or even “beneath” them. They think, “I’m a poker pro, not a storekeeper.”

No matter how well they play, that mistake can easily destroy their careers. In any poker center, you’ll see many wannabes — including some very good players — try and fail to play professionally.

Final Remarks

Studying the stock trading and investment literature can make you a better poker player because it’s based on much better research than our literature. This column covered half of the Motley Fool’s “unpleasant truths” that apply to poker. My next column will discuss the other half. ♠

Dr. Al ([email protected]) coaches only on psychological issues, such as controlling impulses, coping with losing streaks, going on tilt, breaking out of your comfort zone, and planning your poker career.