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  • What Can Investors Learn from Poker?

    Wednesday, November 30th, 2016 by Jeremy Olsen

You’ve no doubt seen plenty of articles in the business world revolving around what business people can learn from poker. And while some of these articles are rather cliche, I recently read a good one on what investors can learn from the poker table.

Appearing on ValueWalk.com, writer Vitaly Katsenelson discussed how other investors have been trying to convince him that we need to focus on inflation and higher interest rates because they could change in the immediate future.

He argues that it’s highly uncertain if we’ll have inflation or deflation in the near future, but one should be careful when listening to anybody who’s strongly convinced one way or the other.

Here’s where Katsenelson brings poker into the equation:

“Any poker player knows that the worst thing that can happen is to have the second-best hand. If you have a weak hand, you are going to play defensively or fold (unless you are bluffing) and likely won’t lose much. But if you’re pretty confident in your hand, you may bet aggressively (god forbid you go all-in) — after all, you could easily have the winning cards. Four of a kind is a great poker hand unless your opponent has a straight flush.

“Generally, the more confident you are in an investment, the larger portion of your portfolio will be placed in that position. Therefore superconvinced inflationists will load up on gold, and superconvinced deflationists will be swimming in long-term bonds. If their predictions are right, they’ll make a boatload of money. If they’re wrong, however, they will have the second-best-hand problem — and lose a lot of money.”

Katsenelson goes on to write that losing with second-best hand is alright if you haven’t bet more than you can afford. The same can be true if you only put part of your portfolio into investments that depend upon inflation and depreciation.

But if you’re going to go all-in with your bankroll/portfolio, then you’d better be sure that you’re holding the nuts. And in Katsenelson’s opinion, risking significant money on an inflating or deflating economy is not a guaranteed top hand.

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