I play poker with a group of friends, all of whom are professionals in various disciplines of work and each is successful in their field. It is clear to me that the participants in trading or risk management roles have an edge at the poker table. Why is this?
The nuanced similarities between active investing and poker are an intriguing study of psychology, strategy and risk. Both activities require intense emotional grit, a good understanding of risk versus reward and an unrelenting dedication to making good decisions in an uncertain environment.
Overcoming uncertainty
Making good decisions in changeable conditions is a powerful skill. Both poker and investing require making decisions with incomplete information; poker players do not know what cards their opponents are holding, while investors cannot predict market movements or fundamental outcomes with certainty.
Poker players use probability and statistics, making informed judgements about betting and folding. Investors use quantitative, qualitative and technical analysis to evaluate investment opportunities and manage risk.
Effective risk management is crucial in both fields. Poker players manage their bankroll to stay in the game, while investors diversify their portfolios and use hedging strategies to protect against losses. Both disciplines do not run from danger, instead they learn to analyse chances and spot patterns to make well-informed choices.
Using process to make good decisions
Knowing when to fold, call or raise in poker depends on the cards you are dealt and the actions of your opponents. Knowing when to trim, exit, add or initiate when running a portfolio depends on the market and the actions of all the market participants. One must analyse company fundamentals and market patterns and then recognise if the investment has the desired risk-reward given the current known information.
A repeatable process is your compass when navigating the turbulent waters of either process. In cards, if you respond without a clear plan, it will make it harder to succeed. For investors, a strategic mindset incorporates planning, long-term thought and the ability to adjust quickly to changing circumstances. This entails having a well-defined investment thesis and the self-restraint to stick to it when short-term market fluctuations appear to contradict your investment strategy.
Keep a check on emotions
What is clear is that psychological control is vital to success in both cases. In both, one must manage your emotions, avoid impulsive decisions and stick to your process – even during periods of loss. Remaining composed under pressure, be it a rough day with the cards or a stock market meltdown, is incredibly beneficial. Decision-making based on process and experience rather than primal fear or greed will undoubtedly win over time.
Timing
Many investors claim that timing the market is impossible and yet everyone tries to time in different ways. Whether placing an investment in the markets or making a bold decision on a poker hand, one must pay attention to timing. Sometimes, the wisest course of action is to do nothing – to wait for the right opportunity and only act when the chances are more in your favour.
Dealing with losses and drawdowns will set you apart
Losses will inevitably occur across both activities. Discipline will ensure that risk management keeps everyone in the game. The ability to grow from setbacks is what sets the great apart. It is also critical to analyse losses to determine what went wrong and modify your plan accordingly. This ongoing learning and development make growth and long-term success possible in both disciplines – experience counts for so much.
The role of intuition
Poker and investing are both an art and a science. Intuition plays a role in addition to data and analysis. Occasionally, the data only provide a portion of the narrative. Investors and players with experience learn to recognise suspicious activity or offers that seem too good to be true. This "gut feeling", which can be helpful when making decisions, is the product of years of experience or a subconscious synthesis of information that is difficult to measure.
Ultimately, the score is kept by track record, in both cases measured by returns on invested capital. No one can win every hand or trade; the best consistently rise to the top over time. "In the short run, the market is a voting machine, but in the long run, it is a weighing machine" Benjamin Graham.
Graham refers to the voting machine reflecting current sentiment, while the weighing machine assesses long-term value. In exuberant markets, particularly those driven by passive investing, fundamentals disconnect and momentum dominates. This is a difficult environment to make informed decisions; emotional resilience, strategic thinking and effective risk management are paramount to managing portfolios.
The Global Equities team at Liontrust takes an Active Plus approach when managing portfolios, quantitively screening global equities, qualitatively applying change lenses and using our proprietary risk management overlay.
It is really no surprise there are many similarities between card games like Poker and Bridge and investing – strategy, risk management, emotional control and a never-ending quest to win – and it is no surprise that top-notch investors and entrepreneurs make outstanding card game players. Warren Buffett and Bill Gates are renowned Bridge afficionados while David Einhorn (founder of Greenlight Capital) and Chamath Palihapitiya (founder of Social Capital) are great Poker players. The skill sets are highly complimentary and supportive of a key feature of our investment philosophy: there are always two parts to any investment decision – what to buy and when to buy!
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds managed by the Global Equities team:
May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May have a concentrated portfolio, i.e. hold a limited number of investments or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio. May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of a fund over the short term. Certain countries have a higher risk of the imposition of financial and economic sanctions on them which may have a significant economic impact on any company operating, or based, in these countries and their ability to trade as normal. Any such sanctions may cause the value of the investments in the fund to fall significantly and may result in liquidity issues which could prevent the fund from meeting redemptions. May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
The risks detailed above are reflective of the full range of Funds managed by the Global Equities team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
