Editor’s Note: At the beginning of this year, I wrote about how much I enjoyed The Oxford Club’s highly anticipated holiday poker game last December.
As a remote worker, I rarely get to spend time with my colleagues in person, so I really appreciated the opportunity to be around them outside of a work setting.
Unfortunately, there’s no poker game on the itinerary for this year’s holiday festivities. So in memory of The Oxford Club’s 1st (and Only) Annual Poker Game, I thought I’d share this article from 2022 about what investors can learn from a man nicknamed the “Poker Brat.”
– James Ogletree, Managing Editor
A couple of years ago, I met a gentleman who told me he had more than 400 open options positions. “That’s too many,” I told him point-blank. “How do you possibly manage 400 positions?”
He brushed aside the question and said he’d taken a beating this year.
I wasn’t surprised. No one can actively manage 400 positions. It’s a completely undisciplined approach that is sure to lose money.
Look, I’m all about diversification. You should have stocks from a wide variety of industries, geographies, and market caps. But if you have hundreds of stocks or options, not only is your portfolio going to be impossible to manage, but I guarantee you’ll have a lot of garbage stocks in there.
In An Economist Walks Into a Brothel – an interesting and very readable book on understanding risk, written by Allison Schrager – there is a chapter on poker champion Phil Hellmuth.
The “Poker Brat,” as he is called, is known for his volatile personality and explosions of rage when he loses a hand that he thinks he shouldn’t have lost.
In the book, Hellmuth discloses that he plays only about 12% of his hands, much less than the 25% to 50% of hands most players play.
His discipline is what makes him a winning player.
Investors could learn a thing or two from the Poker Brat.
Many investors try to make up for lost time and get rich quick. Sometimes it works – sometimes you pick that great stock or option play that goes through the roof, and you make a lot of money. But I guarantee that for every one of those you hit, there will be several losers.
If you’re disciplined and can keep your losers small and your winners big, you can make money.
However, for most investors, discipline comes in the form of picking quality investments and leaving them alone – regardless of what the market is doing, where interest rates are headed, or who is in the White House.
A disciplined player like Hellmuth will mostly play very strong hands, like two aces, two kings, an ace and a king, etc. He’ll also play weaker hands if he is one of the last to bet. (This is known as being in late position, and it’s an advantage because you’ve already seen what the other players have done.) And, of course, every good poker player will bluff occasionally.
Here’s how you can set up your portfolio according to the same principles.
1. Play a Strong Hand
For most of your portfolio, you should do the equivalent of holding two aces: own Perpetual Dividend Raisers. Holding two aces doesn’t guarantee that you’ll win the hand, just like owning a quality dividend growth stock doesn’t guarantee that you’ll make boatloads of money. But it greatly improves the odds.
A company that has a decent dividend yield and grows its dividend by a meaningful amount will generate a solid return each year even without price appreciation… but Perpetual Dividend Raisers also tend to outperform the market over the long term.
RTX (NYSE: RTX), for example, has a 2.2% dividend yield and has raised its dividend every year for over 30 years. Over the past five years, the dividend has grown by an average of more than 6% per year.
Meanwhile, the stock has outperformed the S&P 500 even amid the second straight year of a raging bull market. RTX is up 36% this year, while the S&P 500 is only up 28%.
2. Give Yourself an Edge
Sometimes, a good poker player will play lower-quality hands, like a 9 and an 8 of the same suit, if they’re in late position and believe they have an edge.
That would be the equivalent of buying a stock in an industry that is poised to benefit from current conditions. For example, if energy prices rise this winter because of the unrest in Russia, Ukraine, and the Middle East, most oil stocks will probably do well as the entire sector climbs higher. You don’t necessarily need the top stock in the industry to make money.
3. Know When to Fold ‘Em
Then there’s the bluff, which is when a player has a garbage hand, like a 10 and a 6, but plays it like it’s a great hand. A good player will know whether to bluff and try to make their opponent fold a good hand or simply lay down their cards to avoid losing a lot of money.
In the investing world, that could mean taking a flier on a small stock or option with an upcoming catalyst. If you’re right, you can make some great money. If you’re wrong, you need the discipline to get out quickly so a small loss doesn’t become a big one.
Don’t let a trade become an investment. Have the discipline to fold your cards if it’s not working out so you have enough money to play another day.
Turn the Odds in Your Favor
Like poker players, investors who are undisciplined can get lucky once in a while, but they will lose over time. The ones who are disciplined almost always make money over the long run.
Yell and scream like Phil Hellmuth when a trade goes bad if you want… but if you make smart decisions like he does, you likely won’t need to.