Lesson 5: every gambler knows that the secret to survivin’ is knowing what to throw away and knowing what to keep
Amazingly every gambler may know this secret (which doesn’t make it much of a secret) yet in spite of knowing it many gamblers fail to survive. For investors, the advice is equally true. Long term survival rests on being able to effectively manage winners and losers. Behavioural psychology research has shown that the temptation to stay in a losing trade just a little longer or to exit quickly to take a profit is incredibly difficult for investors to avoid despite knowing better. Like any other skill, mastering holding and folding is something that requires practice and discipline.
Lesson 6: every hand’s a winner and every hand’s a loser
Even though it is not the most famous line from the song, this phrase professes a profound message: that victory or defeat is determined by more than just the hand you have but also by the players you are playing against. For investors, the particular investment may be “quality” but you also have to factor in the market conditions that you’re playing against. The right stock at the wrong time or in the wrong market is still likely to result in a losing trade. Just like professional poker players, professional investors and traders learn to read the market they’re stepping into. Successful professionals use their understanding of the competition to evaluate what setups are likely to work and which are likely to fail based on who they’re playing against.