Back in the mid-2000s, I spent a year or two playing online poker as a side gig. At that point, when ESPN was hyping poker to the moon with endless replays of the World Series of Poker, lots of people were jumping onto online poker sites and just throwing money into tournaments without any sense of strategy, which meant that almost anyone with a little bit of patience could make money doing this.
During that period, I made quite a few friends who were doing the same thing. We shared strategies, gave each other tips, and tried to avoid situations where we would take money from each other, preferring instead to take it from all of the people who were playing foolishly.
In 2006, I began to see the writing on the wall with regards to online poker, so I cashed out completely and dropped out of the scene. However, a few of those friendships persisted. A couple of those friends were playing poker full time and eventually they moved to Europe to keep playing, both online and in casinos.
As time went on, most of those friendships faded away, as friendships do when lives go in completely different directions, so it was really nice to get an email a few weeks ago from one of my old poker buddies. He no longer plays, either, but he kept with it for years after I gave it up and his winnings helped put him into a very good financial place for a while. Today, he’s actually back in school, trying to get a degree in statistics, because he always enjoyed the mathematical analysis part of the game the most.
We swapped some emails, catching up with each other and reminiscing about the good old days, and we got on the topic of how our poker playing actually helped with our day-to-day lives.
He sent me back something that I want to quote here with a little editing (I edited out some flavorful language and touched up grammar and punctuation), with his permission:
More than anything poker helped me to trust in what the right move was even if the result was a bad beat. You can’t look at just a few hands and let that justify your play. If you do that you’re on tilt and you’re just going to cough up money to people. Sometimes bad beats happen and that doesn’t mean your strategy is bad.
I witnessed this countless times when I was playing online poker, and I even fell prey to it a few times myself.
You’d play the game according to a really sensible strategy, based on math and statistics. That strategy, over the long haul, is pretty obviously a good one. My pet strategy at the time was to fold everything that wasn’t an absolutely amazing hand, so I’d actually fold 98% or 99% of my hands. Doing that alone at the time was often enough to push me right into the moneymaking part of tournaments. I would have tournaments where I would literally do nothing but pass and still make money from them.
That strategy worked, over and over again, but there were still times when it would fail. I’d be handed two aces, see another ace turn up, and bet in a perfect way to get someone else to start betting, which will win me the hand 95% of the time — but then the other guy will have an ace as well and have a better kicker card.
The thing is, if you play cards enough, those kinds of bad results will happen in pairs or triplets, or they’ll happen at a key moment to cost you a fair amount of money. It happens. That’s simply part of poker. However, those bad results will sometimes result in a losing streak, and that losing streak will make you start second guessing everything.
When you start second guessing everything like that, it’s time to quit. It’s time to leave the table and get a breather and calm yourself down, because you’re starting to react to a numbers game with emotion, and that’s virtually a guarantee that you’re going to make bad decisions.
Even worse than that, sometimes you’ll make a bad decision right after a series of good decisions with unfortunate results, and that bad decision will have a statistically unlikely great result. You go all in on a junk hand and somehow the cards flip and you somehow win. At that point, you’re playing completely without principles and you’re emotionally and mentally primed to go on a giant losing streak.
Whenever you’re doing something where you’re dealing with likely but uncertain outcomes, like poker or like life, there are times when making a good decision is going to have a bad result. You can play poker perfectly or close to it, but sometimes you’ll still go bust. The danger comes in how you respond to that event, which will happen sometimes.
Here’s another way of thinking about what he’s saying, in more of a personal finance context.
Imagine you’re in a place, much like I was in circa 2006, where you’re struggling to get your financial head above water. You follow all the advice. You start an emergency fund. You spend less than you earn. You start to pay off a credit card. Things are going great for a few months.
Then you wake up one morning and your car won’t start. You have to get it towed to a repair shop where you’re hit with a $100 towing bill and a $1,400 repair bill. All of your financial progress of the last few months is gone.
What do you do?
A lot of people respond to that situation by buying into the notion that it is impossible to get ahead. They look entirely at the “bad beat” of that one car repair bill and how it utterly depleted their “stack,” and they think that their careful play of the last few months was a waste of time. After all that slow effort, they’re still stuck with a small stack. They’re not getting ahead, so, clearly, that strategy must be wrong.
So, they revert back to awful financial behavior. If good financial behavior doesn’t get them ahead, they think, they might as well spend it while they’ve got it. They blow through that emergency fund. They run that credit card back up. Even worse, they’re somehow angry at “the system” because they can’t ever get ahead.
In essence, they go on “tilt” against their day-to-day financial life.
Consider this scenario as well:
Your financial life is finally stable, so you decide to start investing for the future. You understand the reasoning behind investing – you put away some money now, it grows at a faster rate than inflation, and in the future you have more value than you started with. So, you start putting money into retirement and into other accounts.
Two years later, the stock market has another 2008. You lose 40% of the value of your investment in just a few months. A good third of the money you put aside is gone.
What do you do?
For people who aren’t active investors and who just want to put money aside for retirement, the well-established best strategy is to find a low-cost diverse index fund and put your money in there regularly, not touching it until you’re close to retirement, and ignore the ups and downs of the market.
Even knowing that, however, many people still react to a market downturn with panic. They see their investment losing value and rather than reacting with calmness and understanding that sometimes the market does drop in the short term, they instead sell at or near the bottom to “save what they have.” The only problem is that they tend to lose out on a ton of gains on the rebound and just lock in the losses that have already happened. Emotion undermines principles, and when that happens, things tend to work against you.
When people do these kinds of things, they’re actually making a number of mistakes at once.
First of all, they’re basing their conclusion about financial principles on a very small set of data points. If you’re making broad conclusions about your life habits on the basis of a pretty small number of events, you’re very likely to draw some poor conclusions. If you’re making strong financial choices for just a month or two, you’re really only looking at a healthy handful of data points, which isn’t really enough to indicate one way or another whether those moves make sense.
Second, they’re ignoring the advice of people who have actually looked at a lot more data points. The people that preach “spend less than you earn,” like myself, are typically looking at their lives over the course of years or even decades, and have often looked at how that principle has affected other lives as well. They’re basing that principle on a lot of data points.
Third, they’re also ignoring what their scenario would look like without following those financial principles. The principle of “spending less than you earn” has very little connection to a car breakdown. It’s extremely likely that such an event happens anyway, regardless of your financial choices. Stop for a moment and consider the impact of such an event without having spent a few months committing to spending less than you earn. Rather than being something manageable, it would be a complete disaster.
Finally, they’re adopting an alternative strategy that lacks any sort of core principle. Much like a poker player who’s on “tilt” and keeps going all-in on pretty much any hand, a person who regresses to terrible financial behavior is operating on emotion without any core principles guiding them. Over the long haul, actions that aren’t guided by principles are going to result in disaster.
So, what’s the solution here? How exactly can a person handle bad outcomes that follow good decisions without making things even worse?
Have Bedrock Principles and Stick to Them
Over the long term, the principle of spending less than you earn and putting aside the difference for unexpected events in the future simply works. It ensures that those unexpected events have minimal negative impact on your life. It ensures that, over time, you’ll be impacted less by things like interest rates on debts, late fees, and so forth. It ensures that eventually you’ll be able to start investing money to start working for you. Those are the inevitable outcomes of a principle of spending less than you earn.
There are many other similar principles you might adopt, too – the “spend less than you earn” one is just a very foundational principle. You might have a principle of always trying the store brand first and sticking with it if it works. You might have a principle of never eating out while alone.
The goal is to have rules to live by, that govern your actions in a variety of situations and that you better have a very, very good reason for not sticking with them.
Find those principles. Make sure you understand them inside and out. Why do they work? How do they work? How do you actually execute them? If you understand your principles deeply, they become almost foregone conclusions in terms of how you behave. In essence, they become automatic.
How do you find such principles? Read. Pay attention to your life experiences. Listen to wise people. Translate those things you learn into clear principles that you can live by.
With finances, just read lots of sources. I’m proud to think that The Simple Dollar might be one of your sources, but it shouldn’t be the only one. Read books on finances. Look for the common threads that keep popping up and the really straightforward strategies that just make a ton of sense for you. Turn them over in your head until they become well-worn and integrated into your thinking. Actually follow those principles, over and over again, in a wide variety of specific situations.
Understand That Good Principles Are Just More Likely to Have Good Results, Not a Guarantee
The thing to remember about a good principle is that it doesn’t guarantee a good outcome. All it does is ensure a greater likelihood of a good outcome than not following that principle. Over a lot of opportunities, it becomes more and more likely that you’re going to be in a better overall place because of that principle, but there will be times where you don’t get the good outcome you expect.
Spending less than you earn is a great principle that over a given period of time vastly improves the chances that you’ll have a higher net worth and less debt, but it doesn’t guarantee it. Sometimes, emergencies will happen. Sometimes, your car won’t start. That doesn’t invalidate the principle.
Buying store brand items first and sticking with them if they work is a great principle that ensures that you’ll save money on a lot of your purchases, but it doesn’t guarantee it. On rare occasion, you might buy a store brand item that turns out to be unusable for some reason – product failure, allergies, and so on. The occasional “dud” product doesn’t invalidate the principle.
Practicing good social behavior and starting polite conversations with people is a great principle that ensures that you have a much better chance of building a good relationship in a room full of people, but it doesn’t guarantee it. Sometimes, you might start talking to someone who is just unfriendly. Sometimes, you might say the wrong thing at the wrong moment. Those occasional bad results don’t invalidate the overall principle.
Good principles are never guarantees. They merely increase the odds of an outcome that you’ll like. If you expect guarantees in life, you’ll be disappointed time and time again. Instead, you should simply search for good principles that provide a greater likelihood of the outcomes you want, and live by those principles.
Consider What Life Would Be Like If You Never Had the Principle at All
When you see a short term run of bad outcomes from good decisions, such as a period when the stock market tumbles or a period where a bunch of unexpected events drains your emergency fund or puffs up your credit card balances, it can be really tempting to abandon those good decisions.
But simply step back and consider for a moment where your life would be if you had never made those decisions.
If you didn’t choose to commit to spending less than you earn, you wouldn’t have had the emergency fund or the breathing room to make paying for that series of unexpected events. Yes, you might be “back where you started” with regards to your emergency fund or your credit cards, but where would you be if you had never saved at all? It wouldn’t be good, would it.
If you hadn’t been investing at all, you wouldn’t be holding a ton of investments that have now gone through a correction and are poised for a long positive run. If you hadn’t changed things around so that you could afford to easily invest, you would have never caught the bottom of this market and you wouldn’t be able to ride the elevator up all the way from the ground floor. You are in far, far better shape than if you had never invested at all, and you’re poised for tremendous returns in the coming years.
The thing is, whenever you’re living by a good principle and you step back and look at the whole impact of that principle on your life over a longer period of time, you almost always find yourself with a rather large net positive in your life, one that would not exist if you didn’t stick to your principles.
Here’s another example: I might sometimes go to a community event, talk to a bunch of people, and find that none of them click at all with me and one or two seem to actively shy away from me for whatever reason. That could be used in my head as “proof” that the principle of being social and trying to build relationships at community events is a bad one, but if I step back and look at a broad view, I see that I’ve made a lot of connections over the years by just having the courage to talk.
If your principles are sensible bedrock principles that you trust and that you’ve seen have great results in the past, stick with them even in the tough times. Good principles aren’t about perfection, but about simply having a better average outcome than other ways of doing things. You’ll still fail sometimes, and that’s okay, but over the long run, you’ll see far more success with a good principle. When you’re in doubt, step back and look at that long run.
It is very easy to step into a mindset of not trusting your principles when you find yourself on a losing streak at life. The thing to remember is this: principles really matter over the long term, not the short term. If you have a lot of situations in your life where your principles come to the surface, you’re going to eventually have some streaks where your principles do not result in the desired outcome.
Think of it this way. Imagine that life is like rolling a six-sided die, like at a craps table. If you just bumble through life, you might find that you only succeed when rolling a 5 or a 6, and a 1 through a 4 is a failure. On the other hand, if you adopt a principle, you might change the game a little – now a 4, 5, and 6 are successes and a 1, 2, and 3 are failures.
If you roll that die 1,000 times, you’re going to find that there are periods where you keep rolling 1 or 2 or 3. You have big runs of failures. It can seem like your principle fails you. However, rather than looking at those streaks, look instead at the results over 1,000 rolls. You’re going to have way more success over the long run by sticking with principles.
Find good principles. Stick with them. Step back from losing streaks and look at the big picture.
You’ll be glad you did.