Thursday, October 14, 2010

What legends learn from gambling: Warren Buffett & the Rules of the Racetrack

I don’t gamble. At least that is what I would have liked to believe. “Nice people don’t gamble” is what I was told in school and at home. But when I look back on various decisions I took – like my investment in Satyam stock or leaving the job to become self-employed – each looked no different from a gamble. What differed were the odds and the stakes. Now I no longer look at gambling as – stuff that only other people do. It is something we do all the time whether we know it or not. What do people learn from real gambling? Here is an interesting tale from the chapter titled “The rules of the racetrack” in Warren Buffett’s biography “Snowball” written by Alice Shroeder.

“Pop, there is just one thing I want. I want you to ask the Library of Congress for every book they have on horse handicapping.” This is what Warren told his dad Howard who was at that time a Congressman living in Washington D. C. Howard cribbed, “Well, don’t you think they’re going to think it’s a little strange if the first thing a new Congressman asks for is all the books on horse handicapping?” Sixteen year old Warren persisted (1946) and got several books from the library. He studied them all and created his models. Tested them on old data he found in old racing forms in North Clark Street in Chicago. Through this process Warren discovered The Rules of the Racetrack:

  1. Nobody ever goes home after the first race.
  2. You don’t have to make it back the way you lost it.

The racetrack counts on people to keep betting until they lose. Couldn’t a good handicapper turn these rules around and win? Warren was to discover the answer first hand soon.

Warren found a new friend to go to racetrack with, Bob Dwyer, his high school golf coach. Together they started going to the racetrack in Charleston, West Virginia. Dwyer taught Warren advanced skills in reading the most important tip sheet, the Daily Racing Form. Warren recalls, “Sometimes you would find a horse where the odds were way, way off from the actual probability. You figure the horse has a ten percent chance of winning but it’s going off at fifteen to one.”

Then one time, Warren went to Charleston by himself. And he lost in the first race. But he didn’t go home. He kept on betting and he kept on losing, until he had lost more than $175 and his pockets were stripped nearly bare. This is what Warren recalls:

“I came back. I went to the Hot Shoppe, and I treated myself to the biggest thing they offered – a giant fudge sundae or something – and there went all the rest of my money. While I ate, I figured out how many newspapers I had to deliver to make up what I had lost (Note: Warren used to deliver Washington Post in the morning). I was going to have to work more than a week to make back the money. And I’d done it for dumb reasons.

You are not supposed to bet every race. I’d committed the worst sin, which is that you get behind and you think you’ve got to break even that day. [That is when I really learned] The first rule is that nobody goes home after the first race, and the second rule is that you don’t have to make it back the same way you lost it. That is so fundamental, you know. It was the last time I ever did anything like that.”

It is time we give some respect to bookies. By the way, which school do they go to?

1 comment:

  1. Excellent comments with interesting topics and very useful resources. Thanks for sharing.