Can poker make you a better investor?
General view of a poker tournament in Newport Beach, Calif.
TEXT OF INTERVIEW
Tess Vigeland: It's one of the oldest cliches in investing: The stock market is just a casino with a ticker. Take just about any game on the loud, smoky, whiskey-soaked floor of a gaming hall and you've got a metaphor for Wall Street. Slots, roulette, maybe even the ponies and then... there's poker.
Sound of chips spilling
Poker player: Two buck stacks of quarters?
Turns out playing poker could actually make you a better investor. So get out the card table and the plastic chips and your tasty beverage of choice and get ready for a little Texas Hold 'Em.
Bob Frick to fellow players: Yeah, this is high stakes poker, so everybody gets $5 worth of chips.
That's Bob Frick, he writes about investing for Kiplinger's and his most recent article is "How Poker Can Make You a Better Investor." And he recently let us listen in on a pick-up game he held with a few buddies in D.C. They could've chosen just about any form of poker, but the favorite was Texas Hold 'Em.
Frick: So here's the moment of truth. All right Darren, you in?
It's the first of many decisions: Should I throw in two nickels or one dime?
This is like your first decision -- you've had an investment for a few months, now you've got more information and now you have to decide what you're going to do.
Frick: See that's just a nickel, so you know he doesn't have anything, right? I'm wisely going to fold.
All right, so now that's basically... Damn, now I wish I stayed in. Now I'm kicking myself.
Vigeland: Well, now that he's kicked himself, Bob Frick joins us to further explain why we should all be sitting down to a table of cards and coins, before we make our next 401(k) deposit. Welcome back to the show Bob.
Frick: Hi Tess.
Vigeland: Ante up, wouldya?
Frick: What are the stakes?
Vigeland: How 'bout a buck-fifty?
Frick: How about your entire retirement portfolio?
Vigeland: I could go with that. So let's start with what just happened there. You're in the first hand of the game, and you got out too soon. You were feeling all kinds of regret and who couldn't see the parallel on that one, right, what has investing been over the last couple of years, if not full of massive regret?
Frick: Right. One of the primary things you feel in poker when you lose a hand or you should've stayed in, you get this sinking feeling. And we've all felt that in investing. As it turns out, those feelings are essentially firing off the exact same parts of our brains.
Vigeland: And regret is just one of five common errors that you found in both investing and gambling and you talk about these all being emotional errors. So are you telling us that there is emotion involved in investing?
Frick: Well, that's the main problem with investors is we're emotional. Again, the experts have spelled this out so clearly that exactly the same emotional problems that we have in gambling, we have in investing. There's fear, there's greed. And my idea is that there's a shorthand to teach yourself not to do these things and that's by just playing a little Texas Hold 'Em.
Vigeland: All right, let's head back to the poker game and see how it's going.
Poker player 1: Yep, a pair of kings.
Poker player 2: Told ya.
Poker player 3: Pair of kings as well.
Poker player 2: Ah! And a seven! All right, so you're splitting the pot.
Poker players: Queens and threes!
Poker player 2: Two pair wins! Woo hoo!
Poker player: You got the queen on the river, that was nice.
Poker player 4: Hangin' on.
Poker player: With a pair of threes. Wow.
Poker player 4: I don't know what kind of investment strategy you'd call that. Hangin' on! Seeing what happens.
Vigeland: Bob is that an investment strategy?
Frick: Yeah, well it is for a lot of people. And the problem is, people build up in investment, just like you build up hope in a poker hand and you keep on putting more chips in, just like you keep on holding on or even buying more stock, because that's going to justify your decision to hold it to begin with. And it's just wishful thinking, and again, it's a very emotional response.
Vigeland: Although, you know, a lot of folks did hold on after the market crash last year, kind of hoping for a rebound -- a better hand, so to speak -- and they actually got it.
Frick: I mean that's true, it's not that any of these things are wrong all the time. The thing you have to recognize is, for example, the wrong thing, a year ago, February, March, we were at the bottom of the market. And people felt so much pain, people wanted to avoid that pain so much that they cashed out. When you can recognize that you're in an emotional situation, that's when you can set back and start thinking logically and basically not screw up.
Vigeland: Well, this concept -- of course, a lot of fun -- but can you give us a practical example of how you would avoid making the same mistake both in poker and on Wall Street?
Frick: Well, one of the clear things that happens in poker is that you're dealt two aces. And when you have a great investment, you think you've got two aces in the hole. And you think nothing's going to beat it. Well as it turns out, more people lose money on two aces in poker than any other hand.
Frick: Oh yeah. Once you have those two aces in your hand, you get tunnel vision. You tend not to look at what could go wrong.
Frick: So let's say you've got two aces, a spade and a diamond. All of a sudden, four hearts come out on the board. And you're thinking, "Oh my aces are good, my aces are good." Well obviously, your aces aren't good anymore, because someone's got a flush, which is going to be beat your pair. And same thing with an investment. We have this great stock, for example, and all of a sudden, the CEO gets indicted. "Oh well, I'm still going to hold on that stock." And it turns out its product causes cancer, "Well that's OK, it's still a great stock." And we tend to hold these things, until they nose dive, because greed makes us overestimate our odds of success. Same as in poker.
Vigeland: And I suppose a theory is, if you sit down and you learn this about yourself in poker, it's going to make it a lot easier to recognize when you're doing that on Wall Street.
Frick: Yeah, the idea is, if you test yourself when you can identify these things, that's the time you step back with your investments and say, "Maybe I need to take a breathe here. Maybe I need to do something logical, as opposed to emotional."
Vigeland: Are poker players, by nature or by training, good investors?
Frick: Well, I interviewed a number of poker players for this story. And as it turns out, they are surprisingly conservative investors. They take their risk at the table and when they make money, they'll put it in muni bonds or annuities or something like that.
Frick: Oh yeah. Bad poker players, play emotionally; bad investors, invest emotionally.
Vigeland: Bob Frick is with Kiplinger's and his article on poker and investing is currently at Kiplinger.com. We'll have a link to that on our Web site. Bob, do you generally win at poker?
Frick: You know, since I started studying this stuff, I am actually one of the usual winners at my neighborhood poker game, although, those guys would never admit.
Vigeland: Then with that I'm going to fold. Thanks so much.
Frick: Thank you.