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NEW YORK (MONEY Magazine) -
In poker there are no sure things. Even the best starting hands can be beaten.
"You can have 99.99 percent the best of it, and that one-hundredth of a percent will still jump up and bust you," says Pearson. "You can't jeopardize all your money on anything."
That, in its simplest form, is what Puggy means when he talks about "money management."
In investing, of course, this translates into the bedrock principle of diversification. By spreading your investments over a number of types of investments (bonds as well as stocks), sectors, market caps and geographical areas, you enable your portfolio to better weather the ups and downs of the market over the long run.
There's a flip side to Puggy's notion of money management, however, and it too is applicable to both poker and investing. Though you shouldn't bet everything on a single hand, it's often wise to increase your bet when your odds look particularly attractive. Too big or too small -- it's a fine line to walk, but one that many of the finest poker players walk skillfully.
It's a principle investors should learn to follow.
"The market can move for irrational reasons, and you have to be prepared for that," says bond guru Bill Gross, who manages Pimco Total Return, the world's largest bond fund. On the other hand, "you need to make big bets when the odds are in your favor -- not big enough to ruin you, but big enough to make a difference."
Gross played both sides of the dilemma with a series of particularly skillful trades last year. Coming into 2004, bond prices had risen 35 percent during the past five years, yet most investors remained optimistic about them.
To Gross, however, the long rally was worrisome, especially in light of the growing federal budget deficit. He decided to diversify. In February, he announced that he had lost confidence even in his own bond fund (which, given its charter, was not able to radically change course itself) and was selling a portion of his personal stake.
The call turned out to be prescient. Bond yields rose quickly in April and May, causing prices to dive.
Then, in early June, Gross switched his stance. Too many investors were worrying too much about inflation, he thought, and had rushed out of the bond market. He started aggressively adding long-term bonds -- the ones that gyrate most when rates rise -- to his fund.
"We got the sense that the economy was going to slow, and that despite everything, bonds seemed attractively priced again," says Gross. Again, his contrarian bet paid off. In the second half of 2004, rates retreated and bond prices rose. Gross' Pimco Total Return fund ended 2004 up 7.4 percent, beating 71 percent of all other bond funds.
"You have to look for the market's tells," says Gross, using the term for the unintentional gestures that can betray a poker player's intentions. "To me, the giveaway is when fundamentals like inflation change and prices don't."
Rule 3: Know yourself
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Playing poker online? Better watch out.
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