As the Rally Advances, Play It Tight

This blog post originally appeared on RealMoney Silver on July 9 at 7:28 a.m. EDT.

I have a bunch of acquaintances, many in the hedge fund biz, who are playing in the tournament, which is televised on ESPN over the course of the next few months. (One well-known buddy and hedge-hogger was unfortunately knocked out yesterday.) The popularity of Texas Hold 'Em over the last decade is remarkable. Over 6,500 players were in 2009's Main Event, with Joe Cada, taking the first prize of over $8.5 million. In poker, playing tight (or being the rock) means playing very few hands and entering into pots only when one think s/he holds one of the very best poker hands. As I have recently written, the short-term market outlook has improved, and a summer rally seems possible, if not likely. Nevertheless, given the risks associated with a self-sustaining economic recovery and the wide range of possible economic outcomes in 2010-2012, the appropriate investment strategy will be to play tighter as this summer's rally advances. As I have consistently argued, the aforementioned headwinds will cap upside equity valuations. Consequently, investors should err on the side of conservatism and might consider paring back stock exposure into the market's rise that I envision. Poker and Investing I am of the belief that many parallels can be drawn between poker and trading/investing. Back in early 2005, after playing in several events at Jack Binion's Gold Strike Casino in Tunica, Miss., I wrote about this subject, which I wanted to repeat in it's entirety this morning. Poker and trading/investing hold many similarities and after spending a brief period of time with the greatest poker player of all time, Doyle "Texas Dolly" Brunson, here are some of the parallels between both activities. Poker, like trading/investing, is a game of people. In both activities, one needs to get inside one's opponent or the masses' collective heads in order to be consistently winning. Importantly, in both venues, one has to know what makes your opponent or the market tick; what is the mood of your opponent or the psychological condition of investors who set share prices? Neither activity can be gamed just mathematically or statistically. Many computer programmers have tried to game poker and the stock market but they have failed owing to the inability to understand the perception of the moment as judgment requires a human mind. So, after spending 18 hours a day (for four days playing poker), here are some of the specific parallels I have observed. Classes begin! Pay Attention...and It Will Pay You. Concentrate on everything when you are playing/trading. Watch and listen; remember to do both and relate the two. Understand When to Play Aggressively...It's the Winning Way. Don't be a tight or a loose player/trader; be a solid one and recognize when it is time to press your bets/positions. To attain superior returns in poker and investing over the long run, grind it out (in stocks until you are up 30%-40%, and then if you have convictions, go for a 100% year). If you can avoid losing and put together a few 100% years, you can achieve outstanding long-term investment performance. Tells: Look For Them and You Will Find Them. Poker players and stock markets have tells -- giveaway moves that are very revealing. Learn to recognize them. History is your textbook. ESP...It's a Jellyroll. In those rare instances when all your card knowledge and market judgment/knowledge leaves you in doubt, go with your strong feelings and not against it. Honor: A Gambler/Trader's Ace-in-the-Hole. A good reputation and respect from others will put you in good stead. Be as Competitive as You Can Be. Go into a poker game and into a trade with the idea of completely destroying your opponent or scoring a major investment coup. If you win a pot or make a successful trade, nearly always play the next pot or make the next trade shortly thereafter -- within reason. Although the cards and trades might break even in the long run, rushes do happen and momentum often feeds upon itself. When you earn the right to be aggressive, you should be aggressive. When one has a tremendous conviction in a poker hand or trade, you have to go for the jugular. Art and Science...It takes Both. Both activities are more art than science -- that's why they are so difficult to master. Knowing what to do is about 10% of the game. Knowing how to do it is the other 90%. Money Management. The same sound principles of money control apply to the business of tournament/professional poker and to successful investing. The way to build long-term returns or poker winnings is through preservation of capital and home runs. The Important Twins of Poker/Investing, Patience and Staying Power. Come to the poker table or to the markets with enough time to stay and play for a while. Alertness is a Key. You must stay alert at all times. So is Discipline. Never Let Your Mind Dwell on Personal Problems. Never play/trade when you are upset. Make a conscious and constant effort to discover any leaks in your play, and then eliminate them. Control Your Emotions. Allowing your confidence to be shaken can turn a simple losing streak into a terrible case of going bad. Keep your emotions in check. When you lose a pot or make a poor investment decision, get up, walk around the chair or take some deep breaths. Don't lose your poise. If a trade or poker hand does not work out, walk away from the position/hand. Be confident enough about your ability to win afterwards. Schedule Vacations. It is important to give both your mind and your body a rest. Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. 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