How Patience Led Me To 50% Gains

For those that don’t know, in addition to being the Chief Strategist behind StreetAuthority’s Stock of the Month newsletter, I’m also an avid poker player.

I first picked up poker about a decade ago, well before it was all over television. But I wasn’t after the big jackpot like most of the people who’ve taken up the game. I simply thought poker could make me a better investor. Poker has a lot in common with investing — and no, I’m not talking about luck.

In poker, you get only one move at a time. You don’t get the luxury of making your moves in a vacuum or without consideration for the dynamics other players bring to the game. It also takes patience and foresight to win consistently. And sometimes, it’s not about winning, but simply knowing when to cut your losses.

When put in those terms, it’s easy to see how playing poker can make you a better investor.

#-ad_banner-#It’s easy to spot an inexperienced player at a poker table. He’ll be the guy who plays nearly every hand. He’s probably grown up watching televised poker, where folded hands are edited out to highlight the relatively few contested hands. In his limited view, he believes by playing more hands, he has more chances to win. He has no idea how many hands he’ll lose before he gets lucky. I want this guy at my table for as long as his money lasts.

Experienced players describe poker as “hours of boredom punctuated by moments of sheer terror.” Pros fold many more hands than they play. They don’t want to be forced into difficult or tricky decisions when their own money is on the line. As a result, they play only a few high-quality hands that have a good probability of winning. If they aren’t dealt a good hand, they fold it and wait — sometimes for hours.

When put in those terms, it’s easy to see how playing poker can make you a better investor.

Inexperienced investors tend to own too many investments. They mistakenly believe that more is better. For every high-quality stock that outperforms the market, they have three underperformers preventing them from maximizing their profits.

That’s why I count on my experience and skill at the table for my strategy in Stock of the Month. I only select one pick each month to invest in — it’s crucial I make the right call. With a $100,000 real-money portfolio (yes, I buy my recommendations with actual cash), I’m not playing a theoretical game either… this is real money and my picks have real implications.

Fortunately, losing money has been something I haven’t had to worry about; my background and simple, focused strategy is paying off.

A perfect example is a call I made in March 2010 on International Business Machines Corp. (NYSE: IBM). This company had been on my watch list for a while, but I needed a sign that the recovering economy was embracing its expensive technology products in services.

After I saw an uptick in both computer and semiconductor shipments worldwide, I bought 50 shares.

As usual, when I put in my buy order, I got a little shot of adrenaline — not unlike making a call at the poker table. But my research and patience paid off handsomely. I sold my shares for a 49.6% total return in January 2012 — outperforming the S&P 500 Index by 35.5 percentage points.

Some people thought I was giving up on the stock too early. But IBM has fallen more than 15% since I sold it and has trailed the S&P 500 by more than 70 percentage points. And quite frankly I was more excited about some of my recent additions to the portfolio.

In poker, there is an expression for playing a starting hand with the highest probability of winning. It’s called “getting your money in good.” My goal is to “get my money in good” with stock picks like IBM every month. So far, the odds have been in my favor. On my 63 closed positions, all but 11 have had positive returns, including 25 with returns of 20% or more.

But I’ve learned the best poker players — and investors — don’t spend their time thinking about the hands they’ve already won. They are always keeping their eyes open for the next hand to play.

P.S. — Remember that I’m not just paying lip service to investing in my best ideas. I have $100,000 in actual cash behind my Stock of the Month portfolio. So far the performance has been great — 82.5% of my closed trades have posted positive returns. You can get all the details here.