At the start of this year, I shared how much I relished participating in The Oxford Club’s eagerly awaited holiday poker game last December. Working remotely means I don’t often get to meet my coworkers face-to-face, so it was a pleasantly refreshing to connect with them in a more relaxed and informal setting.
Regrettably, this year’s holiday agenda doesn’t include a poker game. To commemorate The Oxford Club’s first (and only) Annual Poker Game, I thought it fitting to revisit an article from 2022 highlighting what investors might glean from the poker legend known as the "Poker Brat."
Let me share a story from a couple of years ago. I met a man who boasted about having over 400 open options positions. “That’s way too many,” I said bluntly, “How do you effectively keep track of that many positions?” He dismissed my concern, admitting he’d taken heavy losses that year.
I wasn’t shocked by his admission. Managing that kind of volume is near impossible; it’s a recipe for financial disaster due to its lack of discipline.
Diversification is certainly a key strategy in investing. It’s wise to spread investments across varied industries, regions, and market capitalizations. However, if your portfolio includes hundreds of stocks or options, not only does it become unwieldy, but it likely contains plenty of poor-performing stocks too.
There’s a noteworthy chapter in Allison Schrager’s engaging book, An Economist Walks Into a Brothel, where she discusses poker champion Phil Hellmuth, dubbed the “Poker Brat.” He’s notorious for his hot-headed nature, often erupting in anger when he loses a hand he believes he should have won.
Hellmuth mentions in the book that he engages in only about 12% of hands, far fewer than the average player who plays 25% to 50%. This level of discipline sets him apart as a formidable player.
Investors can draw valuable lessons from Hellmuth’s approach. Many chase quick riches to compensate for lost time. Sure, sometimes this strategy might yield a significant win, with that one exceptional stock or option skyrocketing. Yet, I assure you for each big win, there are numerous losses waiting.
The real challenge is maintaining the discipline to keep losses minimal while maximizing gains.
For most investors, this discipline manifests in selecting quality investments and exercising patience—ignoring market noise, interest rate fluctuations, or political landscapes. Like Hellmuth, who mostly sticks to strong hands such as pairs of aces or kings, investors should primarily back steadfast investments. Of course, there’s room to take calculated risks, just as a good poker player occasionally bluffs.
Here’s how you can apply these poker principles to manage your investment portfolio:
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Play a Strong Hand
- Focus most of your portfolio on reliable bets akin to holding two aces in poker. Invest in Perpetual Dividend Raisers. While holding two aces doesn’t guarantee a win, it certainly enhances your chances. Similarly, high-quality dividend growth stocks significantly boost your odds of success.
For example, RTX (NYSE: RTX) offers a 2.2% dividend yield, with over 30 years of consecutive annual dividend increases. Over the past five years, its dividends have grown by an average of over 6% annually. Plus, even during a bullish market streak, RTX has surpassed the S&P 500, rising by 36% compared to the S&P’s 28% increase.
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Give Yourself an Edge
- Like a poker player who plays lower-quality hands from a better position, consider industries poised for success due to current market conditions. For instance, rising energy prices amidst geopolitical tensions could lift most oil stocks, offering gains even with sub-top-tier picks in the sector.
- Know When to Fold ‘Em
- Being disciplined means recognizing when to cut losses. This could equate to speculative investments in stocks or options expecting positive catalysts. If predictions miss, quickly exiting to avoid turning a minor loss into a major one is crucial.
The disciplined investor—like the strategic poker player—may get lucky occasionally, but sustained success hinges on smart, strategic choices. Even if you shout and grumble like Phil Hellmuth during losses, following his disciplined decision-making process will often lead to long-term gains.
