EVERYTHING I NEEDED TO KNOW TO BET BIG ON THIS ELECTION!

Roulette is not luck. Roulette, believe it or not, is a skill game.

But isn’t gambling luck? Absolutely not. Putting money on “red” at the roulette table is poor skill at gambling, not luck.

If you put $1 on red and the ball lands on red then you get your $1 back and another $1 as your “winnings”. In other words, the game was GIVING you 1:1 odds (put in 1, get back a profit of 1).

2:1 odds means put in $1, get back $3 ($2 profit).

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This is where the key to gambling, investing, and all decision making come in. Every decision in life.

The casino is PAYING you 1:1 odds. But are you GETTING from the Roulette table 1:1 odds.

1:1 odds means that you have to have at least a 50% chance to win. If you have a 50% chance to win then half the time you get $1 profit and half the time you lose the dollar you put in. In the long run, with a 50% chance to win, you will make on average $0 (you won’t win money and you won’t lose money).

The invention of probability was entirely because people were being GIVEN odds but nobody was calculating what the actual correct odds are?

For instance, if I am making a 1:1 bet (an even odds bet) but I’m only going to win 25% (1 out of 4) of the time, then I am making a horrible bet.

Let’s say I have to pick the only Ace out of 4 hidden cards. I’m only going to win 25% of the time. Let’s say the rules are: if I pick the Ace I double my money. So $1 turns into $1 in profit and I get my original dollar back.

If I play 100 times with 25% odds then I will win (on average) 25 times (the 1 out of 4 times I guess correctly where the Ace is) and I will lose 75 times. So I make $25 but lose $75. So my net loss will be $50.

Not because I was unlucky. But because I was stupid.

If the game is GIVING you odds of X% (1:1 = 50%, 2:1 = 33%, etc) then you need AT LEAST X% odds of winning in order to bet / invest.

Why is Roulette bad? Because there are four choices: Red, Black, “0”, “00”. And if I bet “Red” the casino pays me at 1:1 odds. So I need at least 50%. But because of the “0” and “00” I only have a 47.26% chance of winning each time.

This is how casinos make billions of dollars. Slowly but surely, I’ll win some, lose some, get on a big winning streak, a big losing streak, go to the buffett, go back and go on another losing streak, etc. Slowly but surely, the casino takes all of my money.

Every game in a casino (except poker) is set up that way. The odds are always SLIGHTLY on the casino’s side. With absolutely correct play in Blackjack, you can reduce the advantage the casino has to just under 1%. That is the best bet in the casino but my guess is you don’t know perfectf Blackjack play. And I’ve known card counters. You and I are not card counters.

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By the way, the person who “invented” the first wearable computer was a gambler. He used a computer attached to his foot to calculate based on where the ball was when the roullete wheel was spun, where it would end up when it landed.

Eventually he found it too hard to make money this way (although he did make money, defying the odds…or changing them) so he switched to stocks and made millions.

His book is excellent. “A Man for All Markets” by Ed Thorp. But you might also know him for his classic book, which has sold millions since the 60s, “Beat the Dealer” where he outlined for the first time the principles of card-counting in blackjack.

Ugh! I just wanted to write an article about political bets. But first I want to explain why it’s fun and why it’s a valuable lesson about investing.

We take it for granted that, given a casino game, we can figure out the odds of winning or losing. If we have 2 choices, then it’s 50%, that’s easy right?

But many games are a bit more complicated. But it’s natural, like with most things, vice leads to innovation.

War led to nuclear power.

Porn fueled the rise of the Internet.

And gambling created the entire mathematics of statistics and probabiliy theory.

Gerolamo Cardano was a very “Choose Yourself” person. Maybe too much so but I think I would have liked him.

First off, very vulnerable in his writings. He stated that his mother didn’t want him and tried “various abortive medicines” that obviously didn’t work. He also states that he had many illnesses as a child including “impotence”. I’m honestly curious how he arrived at that conclusion. Was it a physical thing or (my M.O. when first dating someone) psychological.

He wanted to be a doctor but couldn’t get a license in Milan, where he lived, so he moved to a small town and just started practicing medicine. He “chose himself” to be a doctor.

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Only in recent society are we shamed into doing one thing in our lives. “FOCUS!” all the people who are afraid to take risks start yelling at us. But imagine the person who focused on driving horse carriages in the 1890s. He would;ve been out of a job,.

My father had a software business when I was a kid. By the time I was 12 years old I was begging him to change his software to work on this new thing “microcomputers”. I had my first Apple II+. But he wouldn’t do it. “Mainframes aren’t going anywhere,” he said. By the time I graduated high school he was bankrupt and had a nervous breakdown. For years he cried every day. And then for the years before he passed away he sat every day and listened to music all day.

Cardano was not focused. Yes, a practicing doctor. But then he also became a professor of Mathematics. A biologist. A chemist. An astronomer. He wrote over two hundred books. I wonder if anyone had ever said to him, “You can’t do that!” which is the common phrase I hear when I try to do more than one thing.

But this is not why I bring him up.

He was a gambler. And why not? He gambled when he practiced medicine without a license. Hopefully he didn’t cause too much damage and he was never found out.

But with gambling, maybe he wasn’t the best at first. He was constantly losing. Constantly going broke and coming back and going broke and coming back.

Then he said to himself, “Hmmm, maybe some math here will help me.” And it did. He basically invented the theory of probability and was the first one to write about it. He practiced his theories with dice. Both in the privacy of his home and in various gambling establishments. With probability on his side, he became very successful.

Eventually he retired to Rome where the Pope finally gave him a license to practice medicine.

My point! Studying the odds you are given by the game versus the actual odds you come out a winner is important for success!

With dice, roulette, even blackjack, you can calculate those odds.

With poker slightly harder. You have to calculate not only the odds of your hand, but what are the odds your opponent has a better hand or (with the psychological aspect of poker) what are the odds your opponent is bluffing and how do you factor that in?

Some games have “perfect” information. Like Roulette where you know the exact odds. Some games are imperfect (like poker).

Life is a giant imperfect game of chance. Every decision can be a good or bad one and you have information that you know and also information that you don’t know.

Should you plan a wedding on June 10? Yes, that seems very good. But you won’t know until that morning if it rains or not so you have to plan for it just-in-case. You reduce risk by taking into account all the possible events, what their probabilities are, and what the rewards/losses are for each event.

If you plan an indoor wedding for June 10 then the loss is not much if there is a thurnderstorm. But if the loss is great (in an outdoor plan) then if there’s a greater than small chance of thunderstorm, you need to plan.

That’s how gamblers think. It’s the essence of poker. The “pot odds” have to be worth it if you want to bet, combined with the odds of whether or not your opponent has a better hand than the hand you are trying to make.

The math in poker is much more complicated. But all the professional players know the math and take it into account on every decision.

What about investing? The stock market is 100% a casino with imperfect information.

For instance, let’s say Apple is going to have earnings next week. Will they be good or bad? You look up the past 100 earnings reports on Apple and you see (or your computer sees) that 50% of the time Apple went up after earnings, 50% of the time it went down. You see that when they released a new phone that quarter and exceeded expectations on phone sales, then the hisorical occurences were 90 times it went up and 10 times it went down.

And when it went up, it went up pretty big. So you are satisfied with the odds and the reward.

BUT…how do you know if Apple will beat expectations?

The way to gamble in a game with imperfect information is try to use other data to get more information that other gamblers in the game are not getting.

If you just call your friend who works in Apple’s sales department and ask them then that would be illegal insider trading.

So you have to get more clever. You call up 100 stores and ask how many of the new phone they have left.

If they answer “too many!” then you know they miscalculated what the demand would be for the new phone. So many you even short the stock (bet against it).

If they answer, “we don’t have any! It’s on back-order. Should be about 4 weeks.” If the majority answer with that then you know that the phone companies also miscalculated and demand blew it away so Apple will exceed.

Now, you have to assume you aren’t the only one doing this sort of investigating so you start looking at message boards, calling your friends, looking at other high-profitable apple products, etc to get as much information as possible.

The stock market is pricing in certain odds based on all the information collected by all the investors. if you think you have an “information edge” in this game of imperfect information, and the edge is big enough to make you think you have a 90% chance of getting the bet correct and the risk/reward is appropriate for you based on the size of your bankroll (money management being another critical part of gambling mathematics) then you make your bet.

Phew!

I could go on. What are the odds you should invest time in a relationship? Etc. But I really just want to describe my bets on the election betting side, Predictit.org.

Politics is a game of imperfect information.

Who will win? Donald Trump or Joe Biden?

The polls say Biden. But what are the odds they are wrong? What are the odds a debate can help or hurt Biden? What are the odds they cancel the debates? What are the odds the economy is directionally moving down in November (a key indicator for elections), etc.

I’m staying out of that bet for the moment. You can’t make a bet unless you feel you have an information edge that nobody else has. This is true for stocks also.

If it were any other election and if the Democratic Convention was first, and if I saw the Democratic candidate surge in the “prediction market” right after the convention then right before the Republican convention I would bet on the Republican candidate and then take the bet off about a week after the convention ended.

How come? Because I know the statistics on how polls change during, before, and after, each convention and if the market wasn’t baking that in already, I would make a bet.

Ok, enough!

Here’s my bets:

— — — — — -

Who will Joe Biden Pick to Be Vice-President?

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I’ve traded around this market quite a bit. At different times I’ve bet on Val Demmings, Tammy Duckworth, and Susan Rice.

The favorite is Kamala Harris.

The way this betting market works is that “shares” on a particular market trade between 0 cents and 100 cents. If I bet 49 cents on Kamala Harris right now, I would make a profit of 51 cents (100 cents — 49) if she is selected.

That means the market is “giving me” almost 1:1 odds (slightly less at 51:49 but roughly 1:1) or about a 50% chance she is selected.

I think, best case, those are accurate odds and there’s no edge there for me.

But hold onto this thought because I might need this knowledge in a bit.

I have two sources that I think are more informative than me. One says he is leaning towards Val Demmings, the other says Susan Rice, who he has worked with before.

I have to decide, what are the odds either of my sources have reliable information. One is not in the political game but knows people who know people who KNOW.

The other has been in the politcal game for a long time.

I go with the latter. He says, “Biden wants to have a relationship with his VP like Obama did with him. He has to have rapport, like the person and trust her. That has to be Susan Rice. He would hate Kamala.”

I pick up Susan Rice at 21 cents. She’s now at 27 cents but I’m going to hold until I get more information. (I have previously traded in and out of Susan Rice but now willing to hold for the long run).

BUT…she’s still in second place on the market. Clearly people think Kamala has a chance. So I hedge my bet.

I don’t buy Kamala Harris at 49 cents. I buy her in a different market:

— — — — — — — -

“Who will win the Presidency?”

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Kamala Harris is trading at 4 cents. 25:1 odds. For every $100 I bet I can win $2500.

Why is that a reasonable bet? Do I really think Kamala Harris has a 4% chance of being President in this election?

Yes, 4%, maybe a tiny bit more. There’s about a 50% chance of her getting the VP nomination. And another market on Predictit is giving Biden a 16% chance of dropping out before 11/1 which most likely would make her the Dem nominee in that case, and the market is giving the Democrats a 63% chance they win the election.

50% * 16 * 63 is about an 8% chance that the other markets on Predictit are giving Kamala for winning the Presidency.

But the actual “Who will win” market is only giving her 4%. That’s a big difference between 8% and 4% and there’s also the fact that Biden can die before the election (these contracts are not allowed on the betting market but there’s nothing wrong with me using that possibility to adjust my odds).

8 cents vs 4 cents for the same outcome. Count me in for the 4 cent bet!

And it’s a cheap way to hedge (I only have to pay 4 cents a share) than buying shares of Kamala in the VP market. If Susan Rice gets the VP nomination I go from my initial 21 cents to 100 cents. And Kamala for President goes to 0 cents. But if Kamal gets the nomination, her odds for the Presidency should realisticall go to 16 cents but will probably go to ten cents.

I adjust the money I bet accordingly so I can make money either way.

What’s next?

— — — — — — — — — — — — — — — — — -

“5%+ GDP growth by 2020 ?” is a market. I can bet “yes” or “no”.

I suspect people don’t really know what this bet is about.

Each market has “rules”.

The rules for this one say: “The annual rate of increase in real gross domestic product (GDP) in one or more quarters prior to or including the fourth quarter of 2020”

In other words, if Q3 or Q4 GDP growth is an annualized positive 5% than I win the bet.

It doesn’t mean “5% growth in 2020”. It just means one quarter has to have annualized (i.e. you multiple the growth that quarter by four) growth greater than 5%.

We just went down 32% in annualized GDP growth of Q2. Nobody was fooled by this. Every economist in the world expected it. And now Q3 the Fed has pumped in stimulus, we are starting to see the effects of the Congressional stimulus plus we know they will enact a new stimulus. Plus, we can see the upticks in plane tickets, hotel visits, highway traffic, job returns, and money supply.

So it’s almost trival to expect that GDP will grow by at least 1.25% (5% divided by four quarters) in Q3 (or Q4).

I check out my favorite economics blog: First Trust Portfolios Brian Wesbury.

Oh! He predicts “15%” annualized growth in Q3.

Good enough for me! I bet big.

I’m a little up on it. I bet on “Yes” at 73 cents a share. Now it’s at 84 cents but i’m holding it all the way. For me, this is a lock. I think the only edge I have here is that many investors are mostly interested in the Presidential election and don’t normally read economic data so don’t know that we are talking about annualized numbers. (I hope I’m right on this but I think I am!).

Oh, one more bet.

— — -

“Next Justice to Leave the Supreme Court?”

Ruth Bader Ginsburg is by far the “favorite” at 74 cents a share. I put “favorite” in quotes because this one is a bit morbid. Obviously the only reason she would be first is if she dies first.

And I do think that 74 cents, or about 3:1 odds, is about right for her. She’s in and out of the hospital. She’s not doing well.

Ginsburg is 87 years old. The next oldest justice is Stephen Breyer at 81 years old. He is healthy and vibrant. The market is pricing him at just 6 cents (Clarence Thomas is #2 at 11 cents).

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I figure: 81 years old, I have no other information. According to an actuarial calculator, Breyer’s odds of dying within one year is about 6.5%. But I need to factor in Ginsburg’s odds as well and the odds of the other justices.

I bought this contract at 7 cents. Not a good bet. I have nothing to justify 7%. The correct odds are probably more like 3% and a good bet would’ve been at one or two cents.

So I gambled. Shame on me!

Still, it’s like a lottery ticket. I don’t have to risk much and I can have huge upside and I am ok with losing this bet. I bet on 7 cents and it’s currently trading at 6 cents so I’m about 14% down on my “investment”.

Don’t gamble!

In summary, here are my current bets. NOT predictions, by the way, since I might not hold these bets until the end if they go up or down too fast. I will cash out or stop-loss.

- Who will win the VP nomination: Susan Rice at 21 cents (now at 30 cents but I only mention this aspect because I am in it for the long run).

- Who will win the Presidency? Kamala Harris at 4 cents (I’m not predicting she wins. I’m just saying with 25:1 odds and as a hedge against the above bet and for the reasons I describe in article it was a good bet for me).

- 5%+ GDP growth in 2020 — Yes at 73 cents (and I hope I’m reading the rules correctly, else I’m an idiot).

- Who will leave the Supreme Court first ? (Stephen Breyer at 7 cents, now trading at 6 cents. This was gambling. I should not have done it but, what the heck?)

— —

Finally, two more things about our Choose Yourself Hero of the Day: Gerolamo Cardano.

One is: he was one of the best chess players of the 1500s. For two years he did nothing but play chess all day. He said about that time,

“I would never be able to express in a few words how much damage, without any compensation, [chess] caused in my domestic life.”

I know the feeling!

He also was a believer in astrology. He predicted the exact date of his death to be September 21, 1576.

When he was alive and well on that day he drank poison in order to make sure his prediction were true. He killed himself. I suspect he made a bet and used inside information to make sure that bet was a winner.

Written by

For some reason, I’ve turned myself inside out and all my guts have spilled onto my blog. One day I’ll run out of stuff but not yet. http://bit.ly/2blmiaG

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