It is a fact of life that the more money one has available, the gradually easier it becomes to make more from it. Anyone who plays poker will be well aware of the fact that the bigger the stack of chips in front of you, the easier it becomes to increase it still more. The reason why is pure statistical science. In any single hand, unless you have a royal flush, there is almost always a chance you can lose, no matter how unlikely. However, if you play the odds correctly, while you will still lose hands, and even games, you will eventually come out on top if you have enough chips in reserve to last the course and take the hits that the element of chance throws up. Over the course of a statistically relevant volume of hands played correctly, you will come out on top. You will be prepared to lose relatively significant volumes of chips on individual hands because you know that if you are playing correctly, you will likely eventually win big by adopting this strategy. And crucially, you can afford the luxury of taking any of the hits that come your way in the meanwhile.

If you have a relatively limited stack, you will only play when the odds are strongly in your favour and will likely keep the size of your bets modest, meaning that subsequent wins and losses are also modest. You can’t afford to adopt a riskier strategy if you want to stay in the game. If you succeed in gradually increasing the size of your stack through small incremental gains, once you reach a certain point the likelihood is that you will adopt a new strategy and begin to accept slightly higher levels of risk.

While there is a significant volume of variables and potential outcomes in any given poker hand, these are still within the framework of unbending rules and possible combinations between 52 cards. When it comes to investment, the number of variables is greatly increased. However, there is still a very general parallel which can be drawn. Investors who feel that they are not in a position to lose much capital on any single investment must tread very carefully. They must choose investments where any potential loss will be controlled and small. As a result, they must also accept that gains will be modest and their investment capital will grow incrementally.

Investors who are lucky enough to be in a position where they can afford to take losses can take an approach which is somewhat akin to the poker player with the big stack. These investors can make bigger bets when the odds are stacked in their favour and also take a calculated risk against slightly weaker odds. If they have judged the odds correctly, they will know that from several such calculated moves there is a high likelihood that enough will come off to make it a profitable strategy. It still isn’t guaranteed and they may lose enough hands through the element of chance involved to reach the point where they must re-adjust their strategy to take into consideration their changed circumstances. And anyone who has played poker will have witnessed the player with the huge stack subsequently losing it all because they didn’t readjust their strategy at the right point following losses.

While investment is a far more serious affair and any but the most reckless poker player will only play with what they are happy to lose for the fun of taking part I have personally reflected on this particular metaphor on several occasions. An investment portfolio should consist of a ring-fenced, low risk capital base. Once a certain level of capital has been reached anything above that level can be employed for slightly higher risk, higher reward approaches with bands of capital that can be used for increasingly higher risk to reward moves being added if the stack continues to grow. If it decreases the risk approach must be scaled down accordingly.

Comparing investment strategies to gambling is controversial. However, poker is not a casino game or betting with a bookmaker where the odds are always against the player and over enough games the player is statistically certain to lose. In poker the player who perfectly plays the odds correctly each time will always come out on top in a perfect statistical model. In investment there are many more uncontrollable variables that mean a perfect statistical model doesn’t exist. Nonetheless, I still believe in many ways the metaphor has its value if not taken too literally.

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