Thread by @TheCharlieton

I just finished ‘Secrets of Professional Turf Betting’ By Robert Bacon (H/T @maxolson, who brought it to my attention at Berkshire this year).

I picked the book up because horse betting is central to one of my all-time favorite Munger quotes:

That quote goes like this (h/t @farnamstreet):

“The model I like to sort of simplify the notion of what goes o­n in a market for common stocks is the pari-mutuel system at the racetrack”

“If you stop to think about it, a pari-mutuel system is a market.

Everybody goes there and bets and the odds change based o­n what’s bet. That’s what happens in the stock market.”

“Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so o­n and so on.”

”But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it’s not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it’s very hard to beat the system”

Munger

After reading the book, the TL:DR is that Munger is right. There are TONS of parallels between horse betting and investing

In many instances the parallels are so tight that you could swap a few nouns and it would be impossible to tell if it was a Munger or Bacon quote.

The book is composed of two parts.

The 1st, & of greatest interest to me, is about the theory, strategy & psychology of betting. This is basically the “Munger” section.

The 2nd portion is extremely tactical, and reminds me of Greenblatt’s YCBASMG.

Some takeaways from part 1:

The first lesson is that a sound horse betting system is not predicated on just knowing who is favored to win.

The best bettors “never bet on a horse that was only it’s correct price”

You need an “overlay” (edge), that exists when the public misprices the odds

How do we know where an overlay is? One way:

1. Know the ins and outs of how horses are handicapped
2. Make your own price lines without looking at those of the field
3. Compare your line to the public’s line AFTER
4. Bet when yours odds deviate materially from the field

Bacon describes the betting of a pro named Pittsburg Phil.

“If a horse figured to be a 5-to-2 in Phil’s line, he didn’t bet the horse if it was 8-to-5.

He didn’t bet if it was 5-to-2...

But if the horse was 5-to-1 that was an overlay, and Phil bet”

But there is more successful turf betting than simply math:

“There is no use glossing over the fact that some people are temperamentally unfitted for playing the races in a professional manner.

They are unfitted for any speculative game.”

“These people are changeable, hesitating, hot and cold types w wide ranges of moods and with easily stirred emotions.

They lack confidence in themselves and in their methods- if any.

They overbid one day and are too cautious the next.”

”These people switch from one idea to another, without reason.

Nothing can be done for such people until they change their ways.

Any emotion upsets smart handicapping!”

Similarities to indexing:

“Suppose the track’s total legal “take” is 10%. If so, a blind play on the number one post, number eight post, or any mechanical designation can ONLY lose 10% per race, over a period of time...

... For the avg player ANY system is better than no system at all.

At least the system, no matter how bad it is, keeps him out of the switches.

It confines his losses to the actual track take-plus-breakage.”

Substitute “blind play” for “indexing” and its pretty much the same

On the math of the market:

“It should be clear to straight thinking readers that what the pros win is the difference between the public’s actual losses and the percentage of the track take-plus- breakage.”

That is basically Fama’s view of the math relating active vs passive

A few notes on amateur versus pro play

- Amateurs switch position / pros bet straight to win bc there is the least unfavorable take-and-breakage percent there
- Amateurs vary their betting amounts wildly / pros bet in even chunks
- Amateurs vary methods / pros stick to one

“There is no danger of the public ever finding any key to the secret of winning.

But if the public ever did get wise, the principle of ever-changing cycles of results would move the form away from the public immediately

As the public gets wise, the public’s bets cut the prices”

On amateur errors:

“Amateurs ignore any exact application of weight

This is quite in keeping with the Amateurs general rule of doing everything wrong

The neglected factor of weight is the most important of all the elementary factors that determines results of races”

This was interesting to me, because “weight” is an important part of Mungers analogy, and probably also the part I understood the least

Bacon illustrates the point:

“Think back to happy childhood days. You remember how kids played tag & other running games?”

“Did the grammar school boys ever run against the high school boys?

Did the grammar school girls ever have any luck against the boys of the same classes?

What silly questions. Of course not!

[They] had to be a given a head start.”

Weight, it turns out, is the equivalent of the childhood head start.

The scale of weights is used to even the odds, or the perceived odds, of more capable horses running against less capable horses.

On how the odds add up:

If you convert the odds of each horse to a percentage, (1-1 = 50%, 2-1 = 33%, etc) you notice that the odds offered by modern tracks are always over 100%.

Obviously there can only be a 100% chance of there being a winner- the excess is the track’s take.

On the constraints of a big wallet:

“Large Capital is a definite jinx.

That jinx is always a mental hazard in the players own mind.

The person coming into racing with large capital does not have to win. He feels he can afford to gamble carelessly.”

On bet sizing:

- Take 50% of your bankroll and make ten equal bets on sound overlays

- “Each and every bet of those first ten bets is made w the idea that your whole career, your whole future, depend upon winning”

Sounds just like Buffett’s punchcard.

Recommended!

And here’s the handsome book!