First of all, let me just say right up front that I am NOT a gambler. I don’t know too much about card gambling. But I did do some real research and I think you will enjoy this message…
While prudent investing for the long-term is at the polar opposite from the all-or-nothing wagers in poker, the card game does reveal how players can abandon their best chance for overall success in the face of short-term setbacks.
In the card game of poker, some of you may know the name of Annie Duke. Duke had nearly completed her PhD in psychology when she decided to quit grad school to play cards professionally. For the next 20 years she used her scientific knowledge of human behavior to become the third highest-earning female poker player in history.
Her success wasn’t due to the fact that she’d mastered the art of reading her opponents’ minds—though she would factor in their known tendencies. She was able to win tournament after tournament by analyzing and disciplining her own thought process.
Duke saw that the biggest mistake poker players make, the one that keeps very good players from joining the elite, is allowing the short-term outcomes of a game to affect their strategy. While the game certainly requires a significant amount of knowledge and skill to play at a professional level, it is still subject to random and unpredictable outcomes.
Duke says that when a player is winning, it’s natural for him or her to think, “It’s because I’m making good decisions.” But if they lose, they switch to “I’m having bad luck” and abandon their game plan.
Both responses reflect thought patterns that protect the ego of the player, and blind them to the habitual mistakes that keep them from reaching the next level.
To counter this tendency in her own thinking, Duke organized a peer group of players to analyze each other’s performance in tournament play.
She says that when they told each other “the story of a hand,” they wouldn’t mention whether they’d won or lost. In analyzing their strategies they were completely outcome-blind. “Instead,” Duke says, “it was all about the behaviors, the variables, the decisions—not the outcome.”
Her own long-term success and that of other top players is evidence that controlling your emotions and maintaining discipline puts the odds of success in your favor. Having a plan and sticking to it, even in something as random as a card game, turns out to be a critical element in achieving success.
Thirteen-time World Series Poker Champion Phil Hellmuth once said, “If it weren’t for luck, I’d win every time.”
Embracing The Unknown
Top poker players and prudent investors both take into account the ever-present reality of uncertainty. It’s no coincidence that short-term market movements often seem as random as turning up cards in a well-shuffled deck.
Duke says that people like to “connect the dots to find causality.” This gives them the illusion that they can figure out where the game is going next. But nobody can actually do that with consistent accuracy. Poker is far too complex to predict (which is why the game provides endless fascination), and the most successful players take this into account.
The same goes for investing in random and unpredictable global markets. At every level, for every timespan, it’s simply impossible to predict the future with certainty. And for an investor, the smartest reaction to that reality is to diversify your portfolio as broadly as possible and stick to a well-designed plan that embraces the realities of the unknown future. (Of course, this is what we do with our clients!)
So we are certainly NOT recommending that you take up poker, let alone play it for money. But anywhere a lesson in discipline is available it makes sense to learn what we can from it.
Once you and your trusted advisor have developed an investing plan that takes into account your time horizon, income, risk tolerance, and retirement goals, recognize that changing or abandoning it each time you experience a short-term downturn can be catastrophic to your long-term wealth. Sticking to a proven long-term strategy gives you the best chance of success that doesn’t have to rely on luck or accurately predicting the future.
For those of you that don’t have a game plan and strategy, now is the time. Please call us here and we can get you started!