Mathieu Martin |

5 similarities between poker and stock market investing

For my first article on Espace MicroCaps, I thought I would make a parallel between poker, a game I’ve been interested in for many years, and stock market investing.

First off, let me tell you a little bit about myself. Since a really young age, I have always had an entrepreneur mind and have been searching for new ways to make money. Going from websites creation to network marketing, participating in surveys online (at 14 years old, though!), a lawn mowing enterprise and I probably forget some, I finally decided to go towards online poker after hearing about it from a friend who was playing poker for a living. During the last 8 years, after a lot of reading, trials and errors, I finally succeeded and was able to win good amounts of money while still working for the family business. It’s in March 2014 that my good friend and founder of Espace Microcaps, Philippe Bergeron-Belanger, introduced me to stock market investing. Like many people, I bought my two first stocks on a friend’s recommendation without any analysis on my part. Luckily for me, it went really well and I was hooked when I saw the value of my investment begin to go up. Since then, I spend most of my free time perfecting my skills by reading books, taking classes, participating on forums and by talking with investors who have more experience than me. My goal is to become a full time investor in the near future.

Let’s now go on with the main subject of this article. Here are 5 similarities between poker and stock market investing:

1- Variance is at poker what volatility is at stock market

Whoever has played poker before knows that luck is part of the game and that in the short term, bad luck can be pretty brutal sometimes too. In poker, we call that variance. Variance is a measurement of the spread between numbers in a data set. It aims to measure how far each number in the set is from the mean or expectation. In short, higher is the variance, the more the actual results can be far from the expectation; lower is the variance, closer they will be to the mean or expectation. In poker, when you take a good decision, sometimes bad luck still makes you lose the hand. The actual result is then inferior to the expected result. However, if you repeat this good decision hundreds or even thousands of times, in the end luck will almost completely be out of the equation. In stock market, we will rather talk about volatility. In finance, volatility represents the extent of changes in the price of a financial asset. Like in poker, it’s possible to make a good investment decision but something out of left field happens and changes your initial investment thesis and you end up with a loss instead of a profit. In both cases, you need to focus on the fact that in the long term, a series of good decisions will always make you a winner in the end, whatever the short term results might be.

2- Emotions control is primordial and sometimes underestimated

When a poker player goes through a stretch of bad lucks, he can be prone to enter a mental state that we call tilt, which is basically poor decision-making due to a loss of control over his emotions. At that time, the player begins to think in an irrational way and to act impulsively. It’s a very dangerous phase in which any serious poker player must be able to notice what is happening and step away from the table if he thinks he’s not able to make good decisions anymore. In the stock market, the daily fluctuations of stock prices are mostly based on investors’ emotions, who trade according to their spur of the moment. Technical analysis was built around that idea. The chart of a stock is actually a graphical representation of investors’ emotions throughout a period of time. Investors’ emotions can bring the price of stock to a point where it’s significantly different from its intrinsic value – for novices, intrinsic value is a theoretical concept and refers to the value obtained after a rational or fundamental analysis of the risks and future perspectives of a financial asset -. When an investor does the fundamental analysis of a company and takes the decision to buy it, he must be aware of his emotions and not let them influence him when the price of the stock fluctuates. It’s when they listen to their emotions that a lot of novice investors (I’ve done it too) end up buying a stock at its peak after a long run up, just to see it crash in spectacular fashion a few days or weeks after, or sell a stock at a loss to see it make a miraculous come-back right after. I sincerely believe that emotional control and discipline are among the most important elements to improve, for the poker player as well as for the stock market investor, and it is too often ignored.

3- A lot of efforts are required to succeed

To succeed in a particular field, there’s rarely a shortcut or easy way to achieve it. Becoming a winning poker player, or beating the stock market as an investor both require to put a lot of time learning and practicing. Even after 8 years as a poker player, I still make mistakes and there’s always something I can learn from every situation. If you are serious and passionate about something, you won’t see the hours spent learning as a chore or duty, you’ll see them as a rewarding experience that will lead you to the achievement of your goals.

4- To win, you need to exploit inefficiencies

Here is the point that, in my opinion, deserves the most attention. In poker, since the players are playing against each other and not against the house, the winners are the ones who will be able to take the money of the losers. If a player wants to win in a long-term perspective, he must play against players who are weaker than him. It is possible to do so by looking for games in which a lot of bad players are playing, or by improving yourself and learning new strategies that will make you make good decision at a better frequency than your opponents. If I now make the parallel with the stock market investment, we could say that the micro-capitalizations («microcaps», publicly traded companies that have less than 300M$ in market capitalization) are somehow the games in which a lot of bad players are playing and the big capitalizations are the professionals’ playground. Most of institutional funds and wealthy investors in the investment world cannot invest in microcaps because of the illiquidity of most of these stocks on the open market. In sum, this class of assets is less efficient because of the lack of analysts and professionals tracking it. It’s a great opportunity for the private investor with limited resources to conduct his own due diligence and discover promising and undervalued companies.

5- The importance of being well surrounded

Finally, I would like to point out the importance of having people around helping you. I wouldn’t say that this factor is essential to succeed, but my experience leads me to believe it can help a lot. When I first began playing poker, I spent a lot of time on discussion forums asking questions to more experienced players. I also worked with some exceptional coaches who made me grow and improve my game faster. Regarding microcap investing, this is of course Philippe, my partner at Espace MicroCaps, who helped me the most in my journey. I think that it’s particularly important to ask good questions and listen carefully to the answers in order to make the most of the experience of having a coach or a mentor. A mentor or a most experienced person will likely be very open to share his time and knowledge, if the person he’s trying to help really demonstrates his desire to improve and learn, and is not just looking for the easy way or to make the least effort to succeed.

In conclusion, I think that the essence of my message would be: Be passionate about what you do, don’t be afraid to learn and above all, take the opportunity to invest in a unique class of assets that has many extraordinary opportunities.