Investment Lessons Learned From The Poker Table

“I don’t know.” These three words don’t inspire a lot of confidence in the messenger and probably will not get me invited onto CNBC, but that is exactly what I think about the topic I am about to discuss.

I received a few emails from people who had a problem with a phrase in one of my old blog posts. In that article I examined various risks that other investors and I are concerned about. The phrase was “the prospect of higher, maybe even much higher, interest rates.” These readers were convinced that higher interest rates and inflation are not a risk because we are not going to have them for a long, long time, that we are heading into deflation. These readers basically told me that I should worry about the things that will come next, not things that may or may not happen years and years down the road.

I am pretty sure that if that phrase had addressed the risk of deflation and lower interest rates ahead, I’d have gotten as many emails arguing that I was wrong — that we’ll soon have inflation and skyrocketing interest rates, and deflation is not going to happen.

I don’t know whether we are going to have inflation or deflation in the near future. More important, I’d be very careful about trusting my money to anyone holding very strong convictions on this topic and positioning my portfolio on that basis.

Any poker player knows that the worst thing that can happen is to have the second-best hand. If you have a weak hand, you are going to play defensively or fold (unless you are bluffing) and likely won’t lose much. But if you’re pretty confident in your hand, you may bet aggressively (god forbid you go all-in) — after all, you could easily have the winning cards. Four of a kind is a great poker hand unless your opponent has a straight flush.

Generally, the more confident you are in an investment, the larger portion of your portfolio will be placed in that position. Therefore super-convinced inflationists will load up on gold, and super-convinced deflationists will be swimming in long-term bonds. If their predictions are right, they’ll make a boatload of money. If they’re wrong, however, they will have the second-best-hand problem — and lose a lot of money.

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