Learn How Poker Is Just Like Investing in Penny Stocks

Game of money
••• oonal / Getty Images

If you are good at poker, you most likely could be a great penny stock investor and vice versa. There are many lessons and techniques that apply to both disciplines. Here are the nine most significant ones, so next time you've got your eye on that specific "about to explode in price" 25-cent stock, or you are across the table from your poker buddies, keep these concepts in mind.

Mathematical Probabilities

Any professional knows that poker is a game of probabilities. You should put more money on the table with your mathematically superior hands. Limit your bets, or fold, when the odds are not in your favor. Consider how many more:

  • Cards remain in the deck
  • Cards are yet to come to you
  • Cards would help your hand

What are the exact odds that the next card will give you a killer hand? Is it 5% or 65%? Don't think of it like, "If I could only get a spade, then my hand will probably win!"

In terms of the stock market, don't think, "if they could just get the FDA approval for their experimental drug..." Are they burning cash in an industry with dozens of major players and four other similar drugs in development with other companies? The hard facts are your friend in investing, while impatience, frustration, and aspiration are your enemies.

What are the odds of this penny stock standing out? What is the probability that they will even survive the next few years? The real numbers are almost certainly worse than you probably expect. Face the harsh realities. When you see all the obstacles, and you still like your potential penny stock investment, take a look at the other points below before you make a decision.

Do Not Hope

Hope will destroy an investor, just like it keeps poker players in the game for too long. You can always hope to get that improbable card. Sure, maybe you get lucky, but usually, you will not. The same holds true for investing, and especially in the realm of penny stocks. Invest in companies that have a clear path to growing profits and expanding market share.

Avoid those 63-cent shares that are trying to, "cure cancer," or "franchise their Bitcoin-based pot outlets." After sinking hard-earned money into these types of businesses, most investors are left with little besides hope because the underlying business stinks (especially when they sound so compelling)!

Folding Is Winning

Think of every fold as a win. Most poker players stay in with far too many hands. Best practices suggest folding as many as 95% of hands. You live to play another day (or play another hand), and when you do go in, you typically have some pretty strong cards.

With penny stocks, the odds are almost identical to poker. Assuming you are already avoiding Pink Sheet and OTC stocks, and you are focused only on the better markets (which list the shares of the better penny stocks), you should still only consider investing in about 5% of them.

In poker, they call it being a "tight" player. Cautious, careful. When you play poker, you should almost always fold. Be a tight investor. Be incredibly demanding. If you look at hundreds of high-caliber penny stocks, you should only invest in the best two or three.

Recognize "The Nuts"

The absolute best hand in poker is called "The Nuts." Recognize when you have the best possible hand, or understand the odds of potentially getting to the best hand.

Likewise, recognize when you have found a winning penny stock. If revenue trends, market share growth, acceptance of their disruptive technology, and a returning/reordering customer base are implying that you have found a winner, don't settle for a 40% gain. Let the company play it out, and watch the shares soar well beyond what you had originally expected.

Never Say "I Would Have Won"

If you play poker, you know this guy. He folds (oftentimes very wisely), then as the cards come out laments that if only he had stayed in, he would have won. Everybody who plays poker can say that several times a night.

The problem with that attitude is it encourages the same player to stay in the next time when they should fold. In fact, he may have won if he had stayed in (against stupid odds), but he will quickly go broke if he actually played with that strategy. Allow yourself to miss out on "would have won" hands by playing smart.

This is no different in penny stocks. If you are an active trader, and you avoid or jump ship on an investment that subsequently soars higher, do not feel bad. Do not watch the shares as they keep tracking to new prices. Do not let it alter your trading strategy. If you are demanding, which is the secret to investing well in penny stocks, then you will have looked at plenty of shares that headed higher. You will miss plenty of major gains.

Most people forget all the companies that went south and only harbor the bad feelings of missing the boat on that one winner. As a result, they often become less demanding and put cash into more marginal investments. Do not live your investment or poker life thinking about what "could have" been. Like cards, the penny stocks have no memory, and no offense and they really don't care what you almost did. Let it go.

Give Up Early

At the first sign of smoke, sell or fold. In poker, maybe you are hoping for the flush (all cards the same suit), but your odds fall off pretty quickly as each new card is the wrong suit.

In investing, the same can hold true. Maybe the company is selling some new, ground-breaking technology, but they keep getting hit with new obstacles and hurdles. Selling at the first warning signs has its advantages.

The Act of Trading/Betting Affects the Game

In poker, the size/aggressiveness of your betting will tip off other players to the hand you probably hold. Likewise, with thinly traded penny stocks, the very act of buying or selling can move the prices. A small market order of $1,000 is sometimes enough to push the shares by double-digit percentages.

Do More of What Works

Do more of what works and less of what doesn't. These are words of wisdom for poker, penny stocks, and life in general. If you play tight poker and keep walking away with profits, then play tight poker. If this is a losing strategy, then try a different style. If you double your money on debt-free, technology-focused penny stocks with strong management teams, then stick with that style.

Only Use Risk Money

You will invest better when you aren't risking your kids' education fund or the rent money. The same holds true for poker, and some of the best players aren't afraid to throw more chips into the pile when their hand is strong.

Of course, there are major differences between poker and penny stocks. You can't bluff out a company's competition, or read what their business strategy might involve. You can't know what contracts their sales department is working on, or which employees might get fired or hired. Or can you?