When to Hold or Fold Your Stock Portfolio
A Wall Street wizard explains why poker is the perfect metaphor for investing.
Aaron Brown, a managing director at Morgan Stanley specializing in risk management, is the author of The Poker Face of Wall Street.
How can playing poker improve your results? The hard part isn't picking funds or stocks. It's the behavioral questions. Poker players learn about taking risks, what they're good at and not good at. If your fund has gone down, do you cut your losses or put more in? When to hold, when to fold -- that's what's important, and poker is a good way to practice.
Give us some tips. There are four basic strategies. With the blue-chip strategy, you buy the best stocks and hold forever. You pay a lot for safe, secure investments, and most of the time you'll make money. If you don't, they'll say you're unlucky, not stupid. It's like betting only when you have a pair of aces or a royal flush.
The contrarian strategy requires more research to find flawed companies with a good side. It's like playing a lot of hands, even weak ones you don't expect to win. If the cards go against you, fold. But every so often a bluff succeeds, or you have great cards and no one believes it.
And the other two? In small-company growth investing, you have to be prepared to sell quickly because most of your bets won't work. It's like drawing a weak hand, but one that can win if you get one or two good cards. Let winners run.
Value investing [buying stocks that are cheap relative to a company's earnings or the value of its assets] is hardest. Most investors can't do it. The trick is to be confident and double up when the stock goes down. It's like having a strong hand in poker, but for you to win, everyone else has to miss.
Why is poker so popular? Back in the '50s, in the days of steady pensions and employment for life, everyone played by the rules and people weren't interested in poker. But the game has grown in popularity since the '70s. Now you've got divorce and professional uncertainty, but also enormous entrepreneurial opportunities on the Internet and elsewhere. I don't know how you would train yourself to live in this kind of world if you didn't play poker.