High Stakes Poker

I've recently gotten myself into on-line poker through Poker Stars. I blame it on my brother. I've been hosting a $20 poker night every week for almost a year now, but until my brother moved in with me that was it. Watching my brother play poker on my laptop almost every evening in various cash games and tourneys... It was too tempting.

And I started thinking about how poker is like real estate investing (my analogy could probably extend to all investing, but I'll pretend it doesn't so I can feel more original). If you've ever seen Rounders you'll remember that Mike Mc'D and his gang talk about the grind. Poker is a job to them, and they've learned that you don't earn a living from the huge pots, you earn it by winning lots and lots of little pots every day.

Every investment move you make is a gamble. Even US Treasury bonds could go defunct if the Democrats rose up and overthrew the government. Obviously that's a very slight risk, which is why you receive a very small reward (5.07% on a 30-year). Whereas that hot stock you heard about in the cafe could go up 300% in two weeks, but it's more likely to crash.

Poker is the same way. Professional players know that you don't earn a living by taking $100 to a $10/$20 table. You earn a living by taking $100 to a $0.25/$0.50 table and slowly building. If you don't know what you are doing you won't lose too much, but you shouldn't be playing in cash games anyways. If you DO know what you are doing, then the reward for each hand is small, but you don't have the risk of 2-3 bad hands completely wiping you out. (Or, in no-limit games the chance of those hands wiping you out is much much smaller).

In real estate it's the same. Some people gamble big, using all their available cash to buy multiple houses for zero-down and trying to flip them. A very small percentage of them escape unscathed, much less with a profit. The smart investors know that in semi-Efficient Market (like real estate) it's best to make small bets (by putting fair amounts of money down and keeping a reasonable cash reserve) and nurture them into good cash cows.

Unfortunately another similarity between poker and real estate is that the media loves to fawn over, and glorify, the 0.01% of people who gamble big and win big, conveniently ignoring the hordes who made similar bets and lost and ignoring the fact that those "winners" would be unable to replicate their success even under threat of death (it was all just luck).

If you get into real estate investing, get into the grind. Magic profits don't appear overnight and sing happy songs 'till you fall asleep, but the success rate is immeasurably higher. You WILL cash out, just not tomorrow.

And if you happen to be playing on Poker Stars, you may just run into me on the $.10/$.25 no-limit Hold'em tables. I'll be the guy not losing big.

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