It is often said that the secret to becoming rich is easy. Spend less than you earn. It is hard to argue with the logic off that statement but it is still only a small part of financial success. Another equally important part of financial success is to never gamble with your money. You should think about investing as a game of poker where you make strategic investment that is likely to give a good return and that give you a good value in comparison to the risk you take. You should never gamble and bet your money on high risk investment where a large element of luck is needed for you to see a return on your investment. Investing should be skilled based like poker, never luck based like casino games such as roulette and slot machines. The promise of easy money and large jackpots entice a lot of people to casinos all over the world. But is is important to remember that casinos make huge profits and that most people leave the casino poorer then when they came in. It does not matter how big the potential pay day is if the chance of getting it is too small.
Gamble or investment
It can sometimes be hard to know what is to be considered a good investment and what is to be considered gambling. A simply rule on thumb is that if an opportunity seems to good to be true it is likely a long shot gamble. If you know that you like very high risk investments and to dream about their returns it can be a good idea to set a limit for how much you are allowed to invest/gamble on this type of investments. Extreme high risk investments can be an interesting spice in a portfolio but should be kept small enough that the negative effect caused of them failing is minimal. I recommend that you never invest more than 1% of your portfolio in high risk investments.
How to stop gambling and start investing
The key to stop gambling with your money is to start looking on your investment over a longer time span. By focusing on your long term success you will not be as tempted to gamble and take large risks in the hope of getting rich quick. Focusing on your long term success makes you more likely to succeed.
A common problem among poker players is that they are more focused on winning money then they are on avoiding loosing money. The allure of profits is bigger than the fear of loosing money. To become a successful poker player they have to learn that a saved GBP is worth just as much as a GBP that they won. As an investor you have to learn the same lesson. Avoiding losses is just as important for long time success as it is to earn money. This is just one of the many lessons poker can teach you as an investor and that can help you stop gambling and start investing.
Another important lesson that you can learn from poker is risk management and risk assessment. If you want to be successful as a poker player you have to know how to assess risk and be able to judge whether the potential pay day is worth the risk. As an investor you will need to asses the risk of investments the same way. Only when they pay out is bigger than the risk should you ever devote to a pot or an investment. Assessing risk is easier when you play poker than it is when you invest but the basic principles remain the same.
It is important to remember that you can play more poker hands in a single night than you might make investments in a year. That means that the law of averages will have a large effect when you play poker than when you invest. In poker you know that if the risk assessed value of a hand is bigger than the investment required to stay in the hand you should stay in it and you can feel certain to win money over time. When you invest on the other hand every individual outcome will have a larger impact on your overall success since you repeat the action with lower frequency. As an investor this means that you need to be more risk averse than a poker player has to be. As an investor it doesn’t matter how big the potential profit is if the risk is too big.
Poker is not a perfect metaphor for investing and the financial world but in many ways it remains a good distillation of the essence of finance. I therefore recommend that everyone who wants to become a good investor spend some time at the poker tables. There are many lessons to be learned that will make you a better investor and help you in your life in general. You do not need to play for high stakes. The lessons can be learned on any level. If you prove to be a successful poker player you might want to devote more money to it. If you find poker hard you can keep playing at lower levels to learn the lessons without loosing too much money. Good luck.