One of the most intriguing modern-day investors is a venture capitalist named Chamath Palihapitiya. It's not his wealth that captivates me, however. Rather, his humble journey from Sri Lanka to Silicon Valley is downright fascinating.
Unlike other prominent investors, Palihapitiya isn't necessarily known for a keen ability to pick the right stocks at the right times. It was actually a simple game that helped him develop and refine his investment prowess.
Let's dig into how poker informed Palihapitiya as an investor, and what the game can teach anyone about wealth creation.
1. Small contributions can have big payoffs
It's not uncommon for people to avoid investing out of fear that they lack adequate financial resources. What investors should understand is that getting started is half the battle. Similarly, while sitting at the poker table may be perceived as risky, there are strategies players can use to minimize their potential losses.
Palihapitiya explains that making "small bets" is often a superior strategy to going all-in during a game of poker. While this may seem counterintuitive on the surface, there is more to understand about this approach.
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2. Double down and let your winners ride
By consistently making small bets in poker you inherently allow yourself to "play more hands" -- thereby creating a longevity cycle. In other words, if you risk all of your money on one hand and then you lose, your time at the poker table is over.
In some ways, you are able to mitigate risk by lasting longer than the competition at the poker table. This allows you to preserve capital, which you can use to double down at the right time.
These are profound concepts that also apply to investing -- yet they are so often misunderstood. Contributing a couple hundred dollars each month to an index fund can lead to substantial profit over the course of many years. You do not need to invest thousands upon thousands of dollars to generate life-changing gains.
3. Embrace a long-term mindset
It's very easy to buy a stock, only to see its price rise shortly thereafter. Indeed, there's nothing wrong with selling and booking a quick profit. But odds are if this were to occur, you got lucky. More importantly, you've probably left further gains on the table. Why? Because the stock market has proven that it always rises to new levels in the long term.
Both poker and investing can seem risky -- understandably so. The key is to form strategies that help you minimize risk as much as possible.
When it comes to investing in the capital markets, not everyone needs to be a stock picker. Rather, choosing passive vehicles such as exchange-traded funds (ETFs) or index funds is a suitable option for most.
If you are looking for growth and have some appetite for risk, the Invesco QQQ ETF Trust (QQQ 0.30%) will provide you with exposure to leading technology companies including Microsoft, Nvidia, Amazon, and Alphabet -- all in one fund.
By contrast, more prudent choices could be the Vanguard S&P 500 ETF (VOO 0.53%) or the SPDR S&P 500 ETF Trust (SPY 0.53%). Both funds are built to mimic the performance of the S&P 500, thereby providing investors with a high degree of diversified exposure to the world's largest businesses across a variety of industries.
Employing a long-term time horizon is much easier said than done. When you log into your brokerage account and see gains in your portfolio, I understand completely that it's tempting to sell.
But as Palihapitiya explains through his poker strategy, making consistent contributions to your best hands (stocks) can result in outsized gains. The catch is that you need to remain patient. This will help you achieve financial discipline, which in turn helps you double down on your winners in the long run.
