Weekly Meditation 3: Transferable Skills

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Personal lessons from poker and investing

This Weekly Meditation explores the powerful concept of transferable skills. Like many investors before me, I learned some of the essential soft skills for investing from playing poker. During my university years, I turned a modest bankroll of $50 into over $7,000. A significant amount for a student! This meditation will use my personal experiences in both poker and investing to highlight how transferable skills can be leveraged across different fields.

What is a transferable skill

A transferable skill is an ability learned in one context or field that can be applied or adapted for use in another. Here are a few examples:

• Writing: If you have learned to write compelling copy about cooking, you can likely adapt that skill to write engaging content about restaurant visits.

• Technical skills: A mathematician may find it easier to learn basic computer programming due to the overlap in problem-solving and logic.

• Physical activities: If you can jump high as a basketball player, you may be able to excel in track and field high jump as well. A great example is Donald Thomas (@donald_thomas1 on X), a basketball player who took up high jump in 2006 and won the gold medal at the 2007 Track and Field World Championship.

  
  

Thousands of people have successfully applied skills learned from poker or gambling in investing. Here are a few examples.

Famous investors who started out in gambling

One of the most famous investors to start out in gambling is Edward O. Thorp (@EdwardOThorp on X), the inventor of blackjack card counting. In his best-selling book Beat The Dealer, he successfully demonstrated a strategy for gaining an edge at the blackjack tables, which he devised with the help of computer simulations and the Kelly Criterion. Thorp later applied his knowledge to the financial markets and discovered a version of the Black-Scholes options pricing formula (a few months before Black and Scholes did). He went on to set up Princeton Newport Partners, a hedge fund that returned ~20% annualized return over 20 years, without a single down quarter. To control risk, he used the same Kelly Criterion he mastered through gambling.

Another notable example is the Bond King Bill Gross (@real_bill_gross on X), who is said to have learned risk control from playing blackjack, turning $2,000 into $10,000 over a four-month period in Las Vegas.

Famous investors who played poker

Many well-known investors were avid poker players in their youth. One example is Cliff Asness (@CliffordAsness on X), founder of the famous hedge fund AQR (@AQRCapital on X). He has been seen playing with investor Ken Griffin, who, apart from regularly playing poker, has served on the committee for the Wall Street Poker Night Tournament.

Investors like Carl Icahn (@Carl_C_Icahn on X) and Charlie Munger, picked up poker during their time in the Army.  Munger has said that the games he played in the Army Air Corps taught him valuable lessons in strategic thinking, pattern recognition, and risk management.

What poker teaches about investing

Poker offers valuable insights into investing. Some of these lessons have been distilled in three powerful quotes by Charlie Munger:

1. "You have to learn to fold early when the odds are against you, or if you have a significant edge, back it heavily because you don’t get a considerable advantage often. Opportunity comes but doesn’t come often, so seize it when it does come."

2. "Part of what you must learn is how to handle mistakes and new facts that change the odds."

3. "Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand."

But beyond these well-known lessons, poker offers many more subtle and impactful transferable skills.

My personal lessons from poker

The most important lessons I have learned from playing poker are:

• Bankroll management and diversification

• Tilt avoidance and emotional control

• Don’t break the rules

• Separating decisions from outcomes

• Margin of Safety

• Playing the right game

I dive deeper into these six lessons in my Daily Aspects below.

Daily Aspect 13: Transferable Skills

Bankroll management and diversification

My most important lesson from poker came from 2 observations:

1. All consistent winners followed strict money management principles (called bankroll management in poker)

2. Regardless of poker skill, those who did not follow money management principles lost all their money in the end. This was true even for extremely good players!

At the poker tables, and interacting with 100s of poker players, I saw this pattern repeat over and over again: it was only those who followed money management principles who made money over time.

When I started investing, I realized at once that this principle must apply there as well, and that risk must always be respected. In investing, this means diversification. I know many people who lost a lot of money from not diversifying, and some of them are actually good analysts.

Always maintain at least some degree of diversification, so that you don’t lose everything when things go south.

Daily Aspect 14: Transferable Skills

Tilt avoidance and emotional control

I first learned in poker how emotional control can make or break your game. If not kept under control, tilt will eat up a big portion of your money regardless of your skill level at the tables. Even high stakes pros who do not control their emotions lose big money due to tilt. Avoiding tilt is all-important in poker.

Later, I realized the same applies to investing: sticking to strategy and not letting emotions drive decisions is crucial. Just like tilt in poker, fear and greed can lead to huge losses in investing.

Daily Aspect 15: Transferable Skills

Don’t break the rules

I started out playing poker with a bankroll of $50. Over the following 6 months, my bankroll went down to $10.

Why did it happen? Simple answer: I knowingly broke an important rule of thumb.

Why did I break the rule of thumb? I was over optimistic and decided (almost at once) that that specific rule of thumb was “stupid” and “overly conservative”.

Once my bankroll had slowly but steadily gone down to $10, I reassessed the situation. Obviously, I was not playing well enough to win money, and I could see from my hand history that breaking that rule of thumb was a big contributor to the loss. I had done something wrong.

I decided to try again, but this time following all the “standard” rules of thump. Lo and behold, I started winning steadily! Over the following 2 years, I turned the remainder of my bankroll into ~$7,000. In the end, I learned that there were a few moments where a good rule of thumb could be broken. But this was not often. My subjective estimate is that a good rule of thumb can be profitably broken in ~1/20 cases, and the profit from breaking the rule is usually modest, not great.

With this experience, I went into investing following all the sensible standard rules, and it has served me well! I have been lucky enough over my 10 years as an investor to avoid large mistakes. (There has of course been many small mistakes, but you can recover from those😉)

Don’t break the rules!

Daily Aspect 16: Transferable Skills

Separate decision from outcome

What does this it mean to separate the decision from the outcome? Separating the decision from the outcome means to judge whether a decision was good or bad based on the information at the time of the decision, instead of based on the outcome of the decision.

In poker this concept is straightforward. For example, if you have two aces in your hand, and end up all-in against your opponent before the flop (common cards) is shown, then you are the favourite against any other hand. Obviously, you would want this to happen. But you can still lose out on the hand. If the opponent has two kings, it could turn out that the common cards include a king but no aces, and then the opponent wins even though you were the favourite. It is clear that this is bad luck, but the decision to call the all-in was good, because you had no chance of knowing at the time of the decision which cards would show up.

In investing this concept also applies, but it is much much harder to put into practice.

Why is it helpful in investing?

You will make money in some investments and lose money in some. But the losses will be of two kinds: losses due to bad decisions and losses caused by good decisions with unlucky outcomes. The idea of separating decisions from outcomes teaches you to only make adjustments in situations where bad decisions were the cause of the loss, and not in situations where the decisions were good but the outcome was unlucky. It takes clarity, practice and often an outside perspective to figure out if you were unlucky or if you made a bad decision. But with practice, it is doable, and can be very helpful for improving your future decision making.

Daily Aspect 17: Transferable Skills

Margin of Safety

In poker there are so called marginal hands. These are hands where you don’t make much money on average, but you do make a little bit. These hands are complicated for two reasons:

1. Often they are similar to and can be confused with hands that are losers.

2. They often contribute to a lot of risk or volatility in the outcome of each game.It is tempting to want to play the marginal hands optimally, or to try to max out the result of them. I did not like to play the marginal hands—they were frustrating, could lead to mistakes, and made the game more up and down. So I tried just cutting them out, even though they were supposed to be slightly winning.

   
   

The result?

A much steadier and calmer game, where the winnings were consistent and not as prone to roller-coaster rides. It improved the experience and the long-term profitability of my games significantly. It made it easier to play long sessions and to keep confidence in my decision making.

In the end, I decided to take it even a step further, to focus most of my effort on the easy winners, where it was very easy to play and consistently make good decisions.

When I went into investing, I encountered the concept of margin of safety. I recognized that this was akin to playing the strong winning hands and just skipping the marginal ones. Investing with a margin of safety is easier and more enjoyable. It decreases the risk and increases the potential profit as well. Win-win.

Daily Aspect 18: Transferable Skills

Playing the right game

There are different types of poker. There are rapid heads up games, where two players battle out head to head. There are slow full ring games where 9 or 10 players play at the same table. And there are dynamic 6-max tables. There are long-running tournaments and there are cash games where you come and go as you like.

I learned that I was only good at playing full ring cash games or tournaments. The other games didn’t suit my temperament or favour my slower conservative approach.

Investing is the same: there are trades, long positions, short positions, options. Technology companies and railroads and banks and pharmaceutical companies. My experience in poker thought me to only play the right game where I could win.

About the Weekly Meditation

The Weekly Meditation series presents ideas, strategies and principles from the world’s greatest thinkers and achievers. Each week, I explore a subject I’m studying, and for the six days that follow, I share Daily Aspects that break down different elements of the Meditation.