VOL. 128 | NO. 220 | Monday, November 11, 2013
Finance Lesson From Poker
By Robert Feol
By now many hackles may have been raised in opposition to the statement in my last article that 30-year loans are a tool of indentured servitude. Those working in the financial realm may question my qualifications to make such a divisive statement.
The answer may just lie in the game of poker. I have learned some tremendous lessons from studying the game of poker, and often I find principles that apply there also apply to finance and real estate.
One poker saying that I find extremely insightful is “You can’t beat the math.”
Although poker is frequently thought of as gambling, studies have shown that actually it is a game of skill. And contrary to common belief, the goal of poker is not to simply win every hand.
Poker is won consistently, over time, by always getting your money in with the best hand.
Consider: During a game of Texas Hold ‘em, a player has an opening hand of two aces, the best possible starting hand. Another player at the same table gets the second most powerful starting hand, a pair of kings. The two players, in the first round of betting, get all their chips in the middle of the pot and are now both “all in,” before the remaining cards are dealt.
Shouldn’t the player with the best hand always win?
According to Cardplayer.com, 82.36 percent of the time, two aces beat two kings, while two kings beat two aces 17.82 percent of the time. Nearly 20 percent of the time, the aces LOSE to an inferior hand. Why does this happen?
In a nutshell, it happens because you cannot beat the math.
Even if you get your money in “good” 100 percent of the time, statistically speaking, events will occur beyond your control that allow an inferior hand to win periodically.
Excellent poker players understand that this variance occurs, and their only way to combat this is to focus on making the highest probability of success plays they can, like getting their money in with the best hand, whenever possible.
Families interested in strengthening their financial picture would do well to learn this lesson. Doing everything possible to get their money in “good,” i.e. minimizing the amount of interest they pay, focusing on asset accumulation vs. liability purchases, etc., are great ways to sway the odds favorably toward their success.
Even getting a 30-year loan, in which most of your first 15 years of payments are predominantly applied to interest, may NOT necessarily be a great technique for getting your money in “good.” In my next article I will show you how why you simply cannot “beat the math,” when you use a 30-year loan as your primary investing tool, because the odds of success will be stacked against you.
Robert Feol is the host and founder of “Pieces of the Puzzle: Journeys in Creative Real Estate Investing,” talk radio show on FM 98.9 WKIM and owner of Discount Property Warehouse.