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Passive vs. Active Management:
How investing is – and isn't – like a game of Texas Hold 'Em
[Download Printable White Paper]
The strategic and tactical similarities between investing
and poker have long been a source of fascination and
study on Wall Street. A disproportionate percentage of
brokers are avid amateur poker players some have
turned pro. Several firms say they actually look for
card-playing skills when hiring brokers, according to
a recent story in Money Magazine. Others use basic
poker principles to train their traders.
None other than Peter Lynch, the legendary head of
Fidelity's Magellan Fund in the 1980's, said stock
investing was "most like" playing poker.
And then again not. The differences are as striking
and instructive as the similarities.
The most obvious difference is that investing is not a
zero-sum game. In poker, your winnings exactly match
somebody else's loses. But in investing, if stocks have
superior returns over time, theoretically everybody
can win.
Some more than others, of course. And that's where
poker comes in.
Offhand, it might seem that a game of cards i.e.,
gambling is the worst possible venue from which
to draw lessons for level-headed investing. But
in terms of the active vs. passive portfolio-management
debate, the parallels are uncanny. Most of us have
played a few pick-up games of stud or Omaha, and
we've learned enough to know that we won't be
quitting our day jobs anytime soon. But the fact is,
an elite cadre of players makes a good living at this
unlikely endeavor, year in and year out.
Doyle Brunson, for example, has won 10 world
championship bracelets. Somehow he and other
professionals have "factored in" the element of chance
not entirely, of course, but to an extent where they can
financially plan, build careers, purchase homes, raise
families
and even write books on how it's done.
What are their secrets? And what can we learn from
them?
For this essay, we talked with a man an investor
who refers to poker as his "hobby" (though some
would describe him as semi-pro.) "Pete" is not unlike
you: well-educated, with a family, home and a thriving
(non-poker) career. He's a Ph.D. consultant who
specializes in marketing group-medical practices.
Pete travels the country holding seminars and
consulting with physicians. This schedule enables him,
between engagements, to "dabble" in poker
exclusively No Limit Texas Hold Em, at a consistently
high level at a casino near his home in Kansas City,
two or three afternoons a week, never for more than
a few hours per session.
For four years now, Pete has earned $20k to $30k
annually at poker. That's net, not hype. (We've
checked.) You'd never know it to look at him. He is
soft-spoken. Drives a Volvo. And never misses his
son's basketball games.
(cont.)
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