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NEW YORK (MONEY Magazine) -
Generally speaking, poker players can be divided into four types, or personalities, only one of which consistently ends up the big winner.
The first are the Calling Stations. These players stay in every hand and call (or match) every bet. Since in poker there are many more bad hands than winning hands, Calling Stations tend to lose big over time. It's like they've got the 60-40 rule backward.
Second are the Rocks, who have the discipline to fold on lousy hands and to play only the best hands. But they never bet all that much money. Rocks tend to win but rarely a lot, because the anteing cost of just buying a look at the initial cards whittles away at their occasional and meager winnings.
Then there are the Maniacs. These players stay in a lot of hands and raise often. Maniacs will win more hands than Calling Stations, because their large bets cause other players to fold. But when Maniacs lose -- which they often do, because they play bad hands as well as good ones -- they lose big.
Finally, there's the right way to play poker, the way poker is played by successful pros. These players go into pots only with strong hands, and bet a lot when they do. They'll also stay in with a mediocre hand, if they can do so cheaply. Inevitably they still lose some hands on which they bet big. But ultimately the odds work in their favor, and over time they minimize losses and maximize gains.
Bill Miller says those types of personalities exist in the investing world as well.
The Calling Stations are the equivalent of what Miller calls "closet indexers," fund managers whose portfolios closely mirror an index but who still charge high fees for active management. As a consequence, they usually underperform the market.
The Rocks are deep value investors. They stick hard by their principles, only buying stocks after prices have fallen and quickly selling when they rise. Deep value funds tend to make money, but they're not stellar performers.
Momentum investors, of course, are the market's Maniacs. When things are going good, momentum investors make a lot of money. But when the hot stocks crash (think Internet shares in early 2000), they record big losses and sometimes never recover.
Miller -- like nearly all the best investors -- falls into the fourth category. He buys large stakes in the stocks that he thinks have the best chance of outperforming the market, and sticks with them for as long as his initial reasoning remains sound.
Take Google. Many market watchers, MONEY included, said Google's initial public offering overvalued the company's shares, at $85 apiece. It was, after all, a young and unproven company.
Miller, on the other hand, saw a company with the ability to beat even Wall Street's rosiest estimates. Ignoring skeptics, Miller bought 12 percent of Google's shares in its IPO, more than any other investor. Seven months later, Google has outperformed expectations and is up 116 percent. Plus, Miller isn't ready to sell Google yet.
In theory, most of us put ourselves into Miller's style box. In practice, however, we're often ruled by forces within.
A Rock is cautious to a fault; a Maniac, dangerously impulsive. The trick, as Pearson's third rule suggests, is to recognize your natural impulses and correct for them.
"The first thing a gambler has to do is make friends with himself," he says. "A lot of people go through the world thinking they are someone else."
Rule 4: Know your opponents
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Playing poker online? Better watch out.
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