Investing Tips from the Poker Table

Poker players need to know the odds if they want to win more often than they lose. Similarly, stock investors need to do due diligence to avoid backing more losers than winners.

The old Wall Street “greater fool” maxim says that you can always unload an unwise investment to a greater fool than you. As an investor, you can avoid being the greater fool by doing your homework. If you don’t have the time or don’t want to spend it doing due diligence, an index fund may be a better investing strategy for you.

Since betting on losing hands can get expensive, winning poker players rarely invest much in a pot unless they think they have the best hand. Many investors who took a trip on the real estate express probably wish they had applied some tougher standards when they were buying those stocks—or that they had taken a lesson from Fidelity’s Peter Lynch. For every 100 stocks you look at, Lynch says, just 10 are worth a second look, and only one of those is worth buying.

Top poker players also know that betting on your next card is a loser’s strategy. Always bet on the cards you have and get out when it’s obvious that you’re holding a losing hand. An investor who had money in financial stocks might have used this strategy to head for the exits before the downward slide turned into an avalanche. Market experts advise that too many investors, including some professionals, are unwilling to admit a mistake, so they hang on until a stock crashes and burns. This lack of a coherent “sell” strategy is potentially the biggest money-losing risk investors face. The experts advise picking out a price point for selling a stock when you buy it.