Posted on 15 August 2008 by Alex
At War with the Odds …
No one can argue against the successful investing strategies of Peter Lynch of Fidelity Funds. His compounded rate of return is one of the best Wall Street has seen and it extended over a decade. In Peter Lynch’s book on his investment strategy, he emphasizes that traders should learn the elements of the game of Poker to increase their understanding of investing. Since tournament poker is one of my hobbies, I thought we might check out what Peter Lynch was saying about this popular game of skill.
Poker, unlike nearly all casino games, requires skill to consistently win. The casino does not take a percentage in tournament poker, each player is trying to beat the other players in the hand and win the pot. Poker, like trading, is based on probability. Participants in the event must always be cognizant of the risk versus reward of each trade or hand. There is an old saying in Poker that goes something like this, “If you sit down at a poker table and don’t recognize who the sucker is, then you are the sucker.” The same is true of all neophyte traders who want to beat the Wall Street boys but have no knowledge or experience as they enter the world’s toughest business.
| The following table illustrates some of the similarities between Poker and trading |
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Trading - Investing
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Game of Poker
|
| Requires skill and experience |
Requires skill and experience |
| Over trading will hurt you |
Playing too many hands will hurt you |
| Ask yourself: Who is taking the other side of your position? What do they know that you don’t? |
Ask yourself: Why are the other players in the hand with you? What cards do they hold? |
| When in doubt - stay out. |
Don’t play bad hands. |
| Patience is important when waiting for the proper opportunity. |
Patience is important when waiting for the proper opportunity. |
| Reward should be greater than the risk. What is your risk/reward ratio on the trade? |
Reward should be greater than the risk. What are your pot odds? |
| Don’t risk all your capital on any one trade. |
Don’t bet all your chips unless you have a Royal Flush! |
| Never trade without a protective stop. Know when to book your loss and trade another day. |
Don’t call a bet if you know you’re beat; “know when to fold’em”. Never lose more in one session than you can win in the next. |
| Keep your losses small and your wins will take care of themselves. |
Keep your losses small and your wins will take care of themselves. |
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