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How to win at horse races betting...


Aug 31, 2007
Portugal, Europe
... and at investing.

Hands down one of the best articles I've read in a while :thumbsup:

I was well on my way to becoming a professor of Renaissance literature way back in the mid-1970s. One night a classmate invited me to the dog track. I said, "What's that?" About forty-five minutes later, my academic career was over! It was that easy. I had what we Joyce scholars like to call an epiphany. Something about the lights and the animals and especially the blinking numbers on the tote board struck a very deep chord with me. It probably had something to do with a childhood largely mis-spent playing Strat-O-Matic Baseball. I have discovered that many horseplayers used to play this game as children. You rolled dice and with statistically-based cards, you could play out an entire season. This is very similar to the horse racing and gambling that I have been doing ever since.​

I am here to talk about why most of what you have heard about horse racing is wrong, and why horse racing is much more similar to what you do than other forms of gambling. The general public probably thinks that for the most part, horse racing is just like the state lottery or playing craps or roulette in a casino, except that you have horses running around in circles rather than ping pong balls or a spinning wheel.

In fact, horse racing is entirely different from those forms of gambling for one simple reason. In horse racing, you are not betting against the house. In other casino games, you cannot win, with the exception of blackjack and poker. A good litmus test for someone being a liar and an idiot is if someone ever tells you, "I am really good at roulette," or "I win at craps," or "I have a system for beating the slot machines." There is no such thing. These are games with fixed percentages. The casino might as well attach a leach to your forehead when you walk in the door because the longer you stay, the more you will lose, except for short-term, meaningless fluctuations.

The exceptions to that rule are blackjack and poker. If you count cards diligently in blackjack, you can get a 1.5 percent edge over the house. Casinos, of course, don't get built by players having edges, so the casinos will eject you if they figure out that you're counting cards. This happened to me - I was playing a friendly game of blackjack at the Barbary Coast in Las Vegas about ten years ago, and suddenly a floorman came up to me with an Instamatic camera. I thought, "Wow! This guy recognizes me from horse racing telecasts!" I thought he would take my picture and put it up on the gambling wall of fame or something. Instead, he took my picture and said, "Sir, you are no longer welcome to gamble in this casino." Even though I was only playing five and ten-dollar blackjack, I was still counting cards. That is a very small edge that they don't let you have.

The only other game in a casino that you can win at is poker, which is always situated right next to the horse racing area. The reason that you can win at poker and horse racing is the same - you are not betting against the house; you are betting against the other players. This is such a crucial and fundamental difference, and it is lost on the general public. The house is not setting the odds. In roulette, there are 38 spaces on the wheel, and if you pick the correct one, the house will pay you off at 35-to-one, and they will keep the difference. The longer you play, the more you lose and the more the house wins.

When the other players are setting the prices, it is an entirely different story because somewhere between frequently, occasionally and rarely, the public makes the wrong price. That is the beginning of the successful equation in horse racing. It took me about ten years as a racing reporter and columnist, trying to track down the elusive method of picking the winner of every race, to realize that that was a fool's errand. In ten minutes I can teach anyone in this room how to pick the most likely winner of a horse race. There are data about past performance that we publish in the Daily Racing Form that correlate very strongly with the most likely winner in the race. Most horse players spend their lives thinking that if they just studied a little bit harder or got a little bit smarter, they could pick the winner of the race enough to make some money. There is no such thing. Picking the most likely winner is no great feat.

What you really want to do is determine which most-likely winners are good prices and which most-likely winners are bad prices. It is a very simple equation:

Price X Probability = Value​

The entire world of investing is that simple too. Here is what I mean. If a horse has a 33 percent change of winning a race, and if you can get odds of 2-to-1 on him (which means tripling your money), there is no value - the horse is priced correctly. If a horse is 6-to-5 (which means you will only get back 120 percent of your bet) and he is only 33 percent to win, then he is a terrible bet. If you're going to get 4-to-1 (quintupling your money) on a 33 percent chance winner, then it's a great bet.

The majority of people who play horses refuse to think that way. They sometimes say that no horse is worth taking a short price on. That's just not true. If a horse is 90 percent to win a race and you're going to get a 50 percent ROI, then he is one of the greatest bets in history. They sometimes say that all long shots are over-bet and that you should never bet on a long shot. That's not true either. If a horse has a 10 percent chance of winning a race and he's 20-to-1, then you're getting double the value than you should.

What you wait for as a horse player (and investors tell me that they wait for the same thing) is mispricing, for the public to make mistakes. I cannot say for sure why the public makes mistakes in your world, but I know why they make them in mine. The people who most influence the odds in racing are known as "public handicappers". These are the guys at the local paper who run a set of picks every day. "Clocker Joe" or "Cowboy Jim" give you their 1-2-3 picks in every race. Their 1-2-3 picks have an entirely different motivation than your presumptive motivation to make money. Clocker Joe and Cowboy Jim want to pick the greatest possible number of winners so that they can remind their boss at contract time that they picked 31 percent winners in the previous year. That's pretty good for a public handicapper. Yet, with a typical payoff structure, Clocker Joe will still have lost his customers money. We have already taken this analysis to a level of investment and mathematical sophistication far beyond the ken of any metropolitan sports editor. The sports editors continue to reward the Clocker Joes of the world who pick 31 percent winners at very low prices because they don't understand the equation of Price X Probability = Value.

There is also a highly-misunderstood thing at the track called "the morning line". For every race every day, a track employee writes down a set of odds on each horse. These are not the actual prices that you get when you place a bet. They are the prediction of one overworked track employee for how the public is going to bet the race. That employee is not saying, "I believe that horse #1 has a 20 percent chance of winning the race, so I will make him a 4-to-1." He is in effect saying, "For a horse whose past performances look like this, the public is going to make him a 4-to-1 favorite." Those are two extremely different things, and this is not at all understood by the wagering public at large. The public routinely thinks that it means something when a horse is lower than the morning line odds predicted. If a horse is going at 2-to-1 odds when the morning line was 4-to-1, the public thinks "There's action here! THEY know something."

There is a mythical creature at the racetrack that is called "They". The vast majority of people playing the horses believe that there is a "They" - some cartel of brilliant analysts with foreknowledge of the outcome of the races, and when a horse is going off at much lower than his morning line odds, "'They' know. 'They' are betting today." I used to believe in "They" when I first came to the racetrack, but the longer I hung around, the more I recognized that there is no "They." "They" don't exist. Once you believe this in your heart, you have made a huge stride. Some people might argue that it is a stride towards incredible arrogance, and that may well be true, but you cannot play intelligently or profitably laboring under the myth of "They." At least in my world, there really is no "They."

My best guess is that there are maybe 100 people making a good living betting on horses. It is a very tough game. It is much tougher than the investing game for one simple reason. There is a thing in horse racing called the "takeout". You have something in the investing world known as "inflation". The difference is that your $100 today will be worth $103 or $108 by next year. In horse racing, the $100 that the player begins the day with is decreased by 20 percent every time he makes a bet. This is the economic underpinning of horse racing.

In the first race of the day, say the public bets $100,000. The first thing that the track does is take out $20,000 for itself. That $20,000 is used to keep the track operating, to put up the prize money for the horses, to bribe politicians, etc. That is takeout. Takeout in horse racing is much much higher than in other forms of gambling. In blackjack, without card counting, the house edge is about 1.5 percent. In football betting, it's 4.5 percent. It's about the same in roulette. In slot machines the edge is still only set at 6 to 8 percent, and usually the maximum is 10 percent.

The takeout in horse racing is set at 20 percent, and it is kind of an historical accident. Fifty years ago in the U.S., horse racing had a legal monopoly on gambling. The government felt that it was its legal right to extract money from it. The takeout began at 10 percent, which most economists say is probably the optimal rate of takeout for horse racing. That is the number at which people will not notice it, and people will churn their money enough that it is ultimately to the track's benefit. Every five years or so, however, whenever there was a budget crisis, some politician would suggest raising the takeout by a point or two to get more money from the dumb horseplayers. 10 percent became 11 percent became 12 percent became 15 percent and eventually 20 percent. That is the reason that I would be surprised if more than 100 people are making money at horse racing. Fighting that 20 percent bite from the pool race after race is very difficult. If you do the math, if you locked the doors at the race track and people just kept betting, it would take 37 races for every nickel in every customer's pocket to be transferred over to the racetrack. That's one reason that they don't run 37 races per day. Instead, they run nine or ten races, let everyone go home, they go to the ATM to get some more ammo, and they come back the next day. It is extremely difficult to turn a profit over time. You have to really wait for those public mistakes.

Fortunately, there are enough public mistakes that an extremely disciplined and hard-working person can make a living at it. But please do not quit your day jobs. Please. It changes dramatically when you try to do this for a living. Playing horses is a much better hobby. How many hobbies can you show a profit on at the end of the year?
The "wisdom of crowds" phenomenon is common to both horse racing and investing. Over the course of a year, the best public handicappers (all of whom, of course, work for the Daily Racing Form) do not do as well as the assimilated public. We have a guy named David Litfin who is by far the best public handicapper in New York. He picks about 30 percent of the winners each year, which is a very high percentage. This does not get him even, however, because he is forced to make a pick in every race, even races that he doesn't like and wouldn't bet on with his own money. But the public always picks 33 percent winners. How can the public at large, which includes drunk people and crazy people and people betting on the cute one and the one with pink silks, be better than the Daily Racing Form's ace handicapper?

I found the answer to that in James Surowiecki's book, The Wisdom of Crowds. This book popularized a lot of research being done in this area. The most accessible example comes from the game show, "Who Wants to be a Millionaire?" Contestants could request help from three different "lifelines" when they found a question too difficult. They could ask a friend, ask an expert or ask the crowd at large. What they found over the several years of the show was that the crowd was much more likely to be correct than the expert. This may appear to be counterintuitive.

Another example was from the early 20th century in England. There was a contest at a local fair in which the public could guess the weight of an ox. Hundreds of people submitted guesses. Not one individual guess came within five pounds of the correct answer, but the average of all the guesses came within a tenth of a pound of the correct weight. There are certain situations where having hundreds or thousands of pairs of eyes on a problem helps create a higher winning percentage over time. That is why there is no great trick to picking the most likely winner of a horse race, and that is why picking the winner is not ultimately a profitable pursuit.

On the theme of disruptive innovation, I would say that half of the 100 people making money on horse racing are doing so because they came up with an extraordinarily clever idea a few years ago. As you might imagine given the increasing speed and capacity of personal computers, people thought that there had to be a way to feed all of the racing data that's out there into a computer, analyze it, and figure out a way to beat the game. A lot of very smart people backed by some very serious money have taken on this project. They have found that you can beat the crowd this way, but no one could get the return higher than 94 or 95 percent because of the takeout. With a 20 percent takeout, you are doing very well to earn a 94 percent return, but you're still not making any money. This was a huge source of frustration for these guys who couldn't push the program past doing 15 percent better than the general public. Unfortunately, you had to do 20 percent better than the general public just to break even at the game.

So they tried going through the back door. They acknowledged that they probably couldn't push their programs much beyond 15 percent, but they asked how they could lower the takeout. They couldn't ask the legislature to reduce the takeout because they wanted to make a lot of money. Instead, they decided to go into the bet-booking business themselves - "What if we became the house?" They only needed 4-5 points of the 20 percent takeout for their own operations, and they could pay themselves a rebate using the rest of the takeout. Over the last five years, rebating has become the biggest issue in horse racing.

I will probably lose a few of you here, but I will give you the very quick version of why rebating works. The 20 percent takeout model is based on live racing, where the track is responsible for paying for the upkeep of the physical race track, and paying out purse money. About 20 years ago, however, live racing began to be replaced by "simulcasting" - we can sit in a room here in Baltimore and bet on races being run in New York or California.

When that idea came along, the race tracks had no idea what to charge us in Baltimore for the privilege of betting on their races. They couldn't charge the whole 20 percent because someone else was putting on the show, feeding the gamblers, etc. In one of the great arbitrary decisions in history, the race tracks decided to charge 3 percent. It was a ridiculously low number, and it has come back to devastate the industry because 20 years ago, 90 percent of the betting was done on a live basis. Today, only 10 percent of betting is done live. If you are running a race track, you are only getting 20 percent on 10 percent of the bets made on your races. On 90 percent of your business, you are only getting 3 percent.

Here at the Baltimore trading pool, I only have to pay the New York racetrack 3 percent. The other 17 percent goes into my pocket as the Off Track Betting (OTB) operator. Now I can go to the "whales" (the big players) who are using computers to get their return up to 95 percent, and I can offer them a 10 percent rebate on their $20 million or $50 million of bets placed at my windows. The guys who had gotten their programs up to 95 percent are now getting a 10 percent rebate, and suddenly they're making a 5 percent profit on their handle. This is the kind of completely counterintuitive, through-the-back-door thinking that has made a very small number of people able to win at horse racing.

There is another parallel to the world of investing. Just as the location of betting has gone from 10 percent off-track to 90 percent off-track, the types of bets being placed have also undergone a seismic shift. When you first went to the race track, you probably heard that there are three kinds of bets that you can make - Win, Place and Show. A Win bet is for the first-place finisher, a Place bet is for one of the first two finishers, and a Show bet is for one of the first three finishers. Only 25 years ago, over 90 percent of the handle was for these kinds of bets - people would pick a single horse in a single race and decide whether to bet the horse to win, place or show. The only other kind of bet was the "Daily Double", where you would pick the winners of the first two races of the day. This was a promotion to get people to come out for the first race of the day.

The betting public eventually became bored with these three bets. Some of the more fringe types of racing like greyhound racing began to experiment with "exotic bets". Rather than just picking a single horse to win, place or show, they developed the "exacta", where you have to pick the first two finishers in the correct order. Then they developed the "trifecta," in which you pick the first three finishers in the correct order. The superfecta includes the first four finishers in the correct order. They also developed a set of multi-race bets in addition to the Daily Double. These include the Pick 3, the Pick 4, the Pick 5, the Pick 6, the Place 9, all of which are self-explanatory - you have to pick the winners of many races in advance. On one hand, this was just a sign of boredom and decadence on the side of the wagering public, much as it exists in the investing world, which leads you into things like derivatives, options-based assets and other fun games.

In horse racing, these exotic bets became not just a novelty, but also a real opportunity that had not existed previously. The very nature of the exotic bet offered value that was no longer available in the Win, Place and Show pools. There is not a great amount of value in the simple Win, Place and Show bets because the prices tend to correlate pretty well with the probabilities. So there may not be a lot of value to be found in picking horse number four to win a race, but the public might misprice the odds for a horse coming in second in an exacta bet. This new bet created a new opportunity for the public to make a mistake. If you are going to go three or four horses deep into a race, or if you are going five or six races deep into a racing day on a Pick 5 or 6, the chance that the public is going to make a serious mistake grows exponentially. It grows so fast and large that it is worth playing the bets almost blindly. The Pick 4 and Pick 6 routinely pay 50-100 percent higher than the parlay of those four, five or six individual winners does. It is because of inefficiencies in the betting pool and the increased likelihood of the public making a mistake.

The best friend that horseplayers have are the big race days. The saddest thing that has happened to the serious horseplayers has been the growth of casinos and racinos and slot machines over the last thirty years. The worst players (the best players from our point of view) - the ones betting on names and looks and colors - have all left the race track. They are now pulling handles on slot machines all day because of the higher leverage - they don't want to win 10-to-1 on a horse; they want the slot machine to pour out a life-changing amount of money. Horse racing cannot compete with that, so all of the crazy people are now gone from the grandstands. That is terrible for the serious horseplayers!

However, the crazies do come back a few times a year. Kentucky Derby day, Preakness day, Belmont Stakes day, Breeder's Cup day, almost every day at Saratoga, almost every day at Del Mar, the pools are filled with the money of tourists and amateurs - people paying attention to the selections of the public handicappers. It is really worthwhile to wait for those days and bet five times as much on those days as you would on a rainy Thursday at Aqueduct where you know that you are just playing against the other sharks. They'll make some mistakes too, but there will not be a lot of fat in those pools.

There is another phenomenon about the big days and the big races that is not only profitable, but also just as pleasing: once the general public and the media get involved in my little world of horse racing, the opportunities expand exponentially! They get it so wrong that there are wonderful opportunities. I will conclude with an example of that.
It was the spring of 2004, around the time when certain horses begin to emerge as contenders for the Kentucky Derby, which is run the first Saturday in May. It was an indifferent group of horses. There were no superstars or strong contenders from the previous year of two-year-old racing. A horse who began his career in relative obscurity - he was racing in Pennsylvania - slowly became one of the favorites for the Derby. He had a name that people loved - Smarty Jones.
By any historical measure (and there are some very good statistical metrics of pace and time), Smarty Jones was the best of a bad group. He didn't stack up with the great horses of history. As no other horses emerged, and as the general press began to jump on this story, Smarty Jones began to take on a buzz. He was the favorite in the Kentucky Derby, which most people forget because he was quickly recast as an outsider and a long shot. Come Kentucky Derby day, Smarty Jones was a kind of bad favorite. Most intelligent people bet against him. About an hour before the race, the skies opened up, and it began to pour at Churchill Downs. When it rains hard at the race track, the same, predictable thing happens - the horses with early speed do very well. There is a pretty basic reason - they get in front of the field and kick up mud, and the other horses get mad and decide that they don't want any part of this. One or two horses in the lead run their race and nothing much happens. Smarty Jones took the early lead and won the Kentucky Derby by four lengths. He was now certified as the only horse who could win the Triple Crown. People became very excited about him based on this victory in the slop.

Then another phenomenon started to happen. There is now only one horse that can win the Triple Crown since Affirmed did it in 1978. In the two weeks between the Derby and the Preakness, the general news media suddenly descend on the horse racing world. These are people who know absolutely nothing about horse racing. You could point at the stable pony and tell them that it was the Derby winner. You could tell them that the Preakness was 4.5 miles. They really don't know the difference. Since they don't have anything intelligent to say about horse racing, they do what most sports writers do today - rather than writing about sports, they write about human interest stories. This is my profession, but it is a profession that has sunk into the gutter. The journalists in every sport, including horse racing, basketball, baseball, football, hockey or whatever, live for somebody with a sick grandmother or someone with an exotic disease. More than anything, they want a rags-to-riches story or a plucky underdog story, whether or not there is any truth to it.

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Aug 31, 2007
Portugal, Europe
In the case of Smarty Jones, the entire American sporting press picked up on the idea that Smarty Jones was a blue-collar hero. He started his first few races in Pennsylvania rather than in Kentucky or New York, but that's only because his owners lived there, not because he had been "banished to the cheap seats". Smarty Jones' owner owned fifteen car dealerships in Pennsylvania, was a multi-millionaire, and was not much of a sweetheart. But the whole world decided that Smarty Jones now ran for the lame and the infirm and the downtrodden. It was unbelievable. It was front page news in the Times, the Post, the Tribune and USA Today - "Smarty Jones Runs For The Little Guy!" It was absolute and utter nonsense. In Pennsylvania, two different orders of nuns got involved. They came to the track, sprinkled holy water on the horse and put religious medals under his saddle.

So then they ran the Preakness. All of the good horses who had stunk it up at the Derby were no longer eligible to win the Triple Crown. Many of them had been banged up in the slop, so they all skipped the Preakness. Smarty Jones ran against a small field of bums as a very heavy favorite, and he won the Preakness by twelve lengths.
Well, now the world went absolutely crazy. We now had a horse who would absolutely win the Triple Crown for the first time since 1978. Every year at that time, I start going on sports talk shows. By now, Smarty Jones was like the mayor of Philadelphia. Everyone loved him. On my first talk show, they asked me what the odds were of Smarty Jones winning the Triple Crown. "It has to be, like, 95 percent, right?" I told them that he was probably 30-40 percent to win. They attacked me. "Are you insane? Do you hate him? This is the greatest horse we have ever seen!"

Ten horses since Affirmed in 1978 had won the Derby and Preakness and had a chance to win the Belmont. We're not talking about a bunch of palookas. We are talking about horses that you have probably heard of - Alysheba, Sunday Silence and Funny Cide. These are serious horses, most of whom ended up in the Hall of Fame. Ten in a row had lost the Belmont after winning the Derby and Preakness. Statistically, ten in a row is a longer streak than you would expect, but Smarty Jones could not have even been 50 percent to win the Belmont after a streak like that.
I became Public Enemy #1 in Philadelphia for saying that Smarty Jones was not 99 percent to win the Belmont. I was hung in effigy at one Philadelphia talk radio station for saying so.

So we finally get to Belmont. Any reasonable analysis would tell you that Smarty Jones at best should have been even money - 50-50 to win. Even if you loved him and thought he was a wonderful horse (for which there was no empirical evidence), how could you argue against the streak of losses and think that Smarty Jones was more than 50-50 to win? On Belmont Stakes day, he went off at odds of 1-to-5. Five out of every six dollars bet on the race were bet on Smarty Jones. The betting public was saying that there was an 83 percent chance that Smarty Jones would win.
You don't get opportunities like this every day or even every year. This horse was between 30-50 percent to win, and he was being bet as if he were 83 percent to win. This was one of the most fabulous opportunities in the history of betting. You didn't even need an opinion about who would beat him. I bet on all of the other horses in the race, and I weighted and dutched my bets.

In all fairness, Smarty Jones ran the best race of his life that day. Two or three different horses took shots at him early, and he turned back the challenges. When he got to the deep stretch, he wasn't able to turn back any more challenges. A long shot came along and ran right by him. I have never seen a race track become so sad and so silent all of a sudden. It reminded me of a Charles Addams cartoon. The Addams family is at the opera. At the tragic death scene, everyone in the audience is weeping and wailing. And there is Uncle Fester sitting there with a huge smile on his face. That's what I felt like on that Belmont Stakes day. Every other person in the house was so sad that Smarty Jones had not won the Triple Crown, but the real horseplayers had just cashed the best horse bet that they had ever cashed.

That is how my world works. It probably has some parallels to yours. I would very much like to take your questions. Thank you.

Q: How much did you win?
A: About a quarter of a year's salary.

Q: Are there better odds betting on college football games than pro football games because people's emotions are more tied up in college football?
A: The people I know who play sports (and I am not convinced that there is a great deal of money to be made in betting sports) do what I do. They are waiting for a public mistake. There is no great mystery about who is supposed to win a particular game. The question is whether the line is 3 when it should be 9 or vice-versa. Serious sports bettors wait for those opportunities when the line is bad. There is a much better chance of the line being bad in a college game than in a pro game because there are so many more schools and a much smaller database about the participants. The sports bettors that I know see much better opportunities in betting college than pro, but I am not sure how important the emotional component is.
Probably the best opportunity in pro football is to bet against permanent public prejudices. I once saw a study that if you bet against the Dallas Cowboys for ten years, you would come very close to breaking even. The lines are terrible on those games. For whatever reason, bettors across the country idolize the Dallas Cowboys and the spread is wrong on almost every Cowboy game. It may only be a half point or a point. The guys who set the spreads for football are not trying to pick the game correctly, and they are not trying to offer the best possible opinion. Their goal is to split the money exactly in half - they want to pick a number such that 50 percent of the money will go on either side of it. If that happens, then they take their money out of the middle with no risk or exposure. Roxy Roxborough might have thought that the Giants were 12 points better than the Redskins, but he would make the line 9 because he knew that at that number, the betting would fall equally on either side.

Q: It was interesting that the takeout for off-track-betting is only 3 percent. Does the state not participate in that? And at what point do you start getting the rebate?
A: The receiver of the signal in simulcasting only pays the host track 3 percent. The receiver is still keeping the 17 percent. At Pimlico, they keep the 17 percent on races run in New York, and they actually do better than on their own races. Pimlico is not giving anyone rebates. Rebates are in a bit of a gray area. Tracks now have "rewards programs" where they give you a TV or a 1 percent kickback if you bet enough. They haven't gotten aggressive with rebates. The guys who turned themselves into rebaters found states without an OTB system or racing in place. They told the government of South Dakota that if they installed OTB, they'll pay taxes. Suddenly all of the lodges and veterans groups in South Dakota were getting free money that they hadn't seen before. Really this was a group of gamblers putting the 17 percent back into their pockets. As a rule of thumb, you have to bet at least a hundred thousand dollars a year to get any kind of meaningful rebate. The guys getting 8-10 percent rebates are betting well over $1 million a year.

Q: How do you counteract the natural tendency to become emotional in your decision-making?
A: Be a contrarian. This is my nature. When someone tells me something, I immediately ask them what makes them think so or I tell them that they are probably wrong. You can call it contempt and arrogance, I suppose, but I like to challenge what people say because they say things for bad reasons. I did not talk today about "inside information" in horse racing. Like "They", inside information does not really exist. Every once in awhile, people can keep a horse a secret who is making his first start, and there is a tendency towards larceny in the hearts of horseplayers. But this doesn't happen very often and this is a pretty well-regulated sport. Nevertheless, participants in racing (owners, trainers, etc.) would rather steal a nickel than earn a dime. They all think that they've got big secret information. Just for the sport of it, I once kept track of a year's worth of tips that I received - the ROI was horrendous, less than 50 percent. I worked at the tracks in New York for several years. They had betting windows on the back stretch just for the help and the trainers. Out of morbid curiosity, I looked to see how well those windows did - the take was much higher there than anywhere else at the track. I am personally skeptical of pronouncements by people who claim to have specialized knowledge because most of the time, they are saying it for reasons of ego - they want to look important, and I am immediately skeptical. It pays to be skeptical.

Q: How do you determine the intrinsic probability that a particular horse will win?
A: Doing it for twenty years has given me very good instincts. I am not being a smart-alec. This is a legitimate question since I am basing my approach on the disparity between true probability and public odds. There is not an eight-point formula. If you bet on tens of thousands of races year after year, you will get to the point where you can see the important information just by looking at a page of data. You cannot get too precise about it. You cannot quantify the difference between a horse that is 30 percent and 32 percent to win - after a point, you're just splitting hairs. If you can be fairly certain that a horse is in the 30-33 percent range, then you can bet pretty confidently if the public is betting him at 22 percent or 44 percent. It is hard to get very precise.

Q: Given the horrendous returns on horse betting and the horrible economics of horse tracks (at least the public ones), what do you think the future of horse racing is in the US?
A: It is still a pretty robust market. The annual handle in the US is still about $16 billion, which is pretty good especially given how horse racing as an entertainment activity has been left in the dust by casinos. The next big step in horse racing is the globalization of the betting market. I am salivating over it. I love enthusiastic gamblers more than anyone, but these people in the Far East are insane! The per capital betting in Hong Kong is ten times higher than in the US. The per capita betting at Belmont on an average Saturday is $150. At Happy Valley in Hong Kong, it's $1500. Those people are going to start betting on our Triple Crown and Breeders' Cup races with that kind of mania for action - I can't wait! That's going to happen within one or two years.

Q: How prevalent is the doping of horses, and how does that affect handicapping?
A: Well, there's horse doping and there's horse doping. It is very rare that someone will give a horse a miracle injection that will make him run ten lengths faster. In New York, for example, horses are now detained for twelve hours before a race and subjected to a battery of tests. The most sophisticated chemists are always going to be a half-step in front of the testers, but you can't just give a horse a shot of rocket fuel and go cash a bet on him. The detection and regulatory system is far too sophisticated. Having said that, looking at pictures of horses 15-20 years ago is like looking at photos of Barry Bonds 15-20 years ago. Horses are definitely bulked up. Unlike Major League Baseball, anabolic steroids are not illegal in horse racing. A lot of leading trainers will say that all of their horses are on steroids. It is not quite so nefarious as it is with humans. If a horse is returning from an injury or illness, he actually needs steroids to put the weight back on. They have been very much overused in horse racing. The owners who can afford trainers who charge them $1,000 each month for medications and steroids are doing better as a group than the owners who do not buy the proper shoes and medicines for their horses. It is not quite cheating, but there is definitely an overuse of drugs in horse racing.

Bill Miller: You have been fabulously successful at what you do. Do you ever wonder if someone had shown you back at Harvard a Black-Scholes model or a convertible securities arbitrage rather than the dog track, you could be worth a billion dollars?
A: Probably not. There is an undeniable appeal to the race track. Winning money at the track feels kind of like stealing in a way. Maybe you feel like you're stealing all the time too! I get to go to a sporting event and walk out with more money than I walked in with. There is a truism in racing - what would happen if everyone knew that the fourth race of the day was fixed? The handle would triple. Everyone loves the idea of figuring out a mystery! I would not have been attracted by a more wholesome form of investing.

Bill Miller: What books have influenced your thinking about either handicapping as a specialty or probabilistic thinking? What are you reading now?
A: I couldn't give you specific titles, but in general the most influential books have been from other fields rather than from within my own. We started a book publishing division at the Daily Racing Form, and we can come up with four or five solid titles each year. Nobody else is publishing books like these. There is not a lot of academic work being done in this field. It is probably true in other pursuits as well, but the out-of-left-field ideas from other disciplines are ultimately more useful than ideas from someone who does the same thing that you do every day. I try to read widely outside of racing because that is where the real "light bulb" ideas seem to come from.

Q: Are there any material differences in probabilities and the quality of information between thoroughbreds and harness racing?
A: With apologies to anyone who might be a harness racing owner or enthusiast, harness racing is a lot like professional wrestling. It is a sport that is just about over. There are no more serious harness racing bettors. There are fewer and fewer harness racing events every year. It has a reputation, warranted or not, of not being an activity on the up and up. That is one reason for its decline and for there being a very small body of literature on handicapping harness races. That is about as diplomatic as I can be.

Q: It is my understanding that in the UK, betting is done by private touts at the race track, and the bets are not pooled. Would this change your approach?
A: You are absolutely right. In England, you have the choice of betting with the tout (the pool, like in the US) where the public sets the odds, or of betting with the bookmakers, where you get your price at the time that you bet. There are pros and cons to either approach. The bookmakers are not going to make the gross mistakes that the general public does, but they will make the occasional mistake that you can lock in on. The bookmakers minimize their own risk by laying off their bets with each other. At the end of the day, they don't truly have a great deal of exposure. If a horse is listed at 8-to-1 and he should be 4-to-1, the odds in the public pool could be hammered down to 4-to-1 before the race begins. If you bet with a bookmaker, you will get the 8-to-1 odds.

Q: When you look back at your career, how have you dealt with losing streaks and unusually great winning streaks?
A: The worst thing that you can do is get on a winning streak, unless you have tremendous discipline, which I did not used to have at all. You think that you have finally "figured it out". You think that the game is now easy, and you start betting more and more. Of course, you know what happens next. You have to know yourself and your bad habits. One of the things that I used to do when doing well was to cut back on my homework. I would start to feel that "I just know this stuff". The moment that you stop doing the work, you're about to start a bad losing streak. I played horses as a primary means of income for three or four years. The rest of the time, I have been fortunate enough to have other jobs that allowed me to treat horse racing like a hobby. It changes everything when you are gambling to pay the bills. That was the least fun I have ever had, and it was the most pressure I have put on myself. Losing streaks are horrible when you are losing not your disposable income but…whatever is the opposite of your disposable income. People take losses much harder when they are doing it for a living. When things go badly, you just have to walk away from it. Give yourself some time, and then start over. This is a lot more difficult to do when you need the money to pay the bills.

Q: If you could organize a race with any five horses in history, which horses would you choose, and which horse would you choose to win?
A: I will limit myself to 20th century American horses. There might have been a great horse in Hungary in the 18th century that I'm not familiar with. The best horse is Secretariat. He is the greatest horse who ever lived. He set track records at all three legs of the Triple Crown. He did things that no horse has done before or since. The others are not very imaginative selections - you have probably heard of all of them: Count Fleet, Man o' War, Whirlaway, Seattle Slew.

Q: How do you implement your strategy if the odds are always changing? Do you wait until right before post time?
A: It's a good question. The odds are always changing, and they change much more and much later than they did twenty years ago when most of the betting was at the track. Technology in racing is extremely primitive - they are almost working on Radio Shack technology thirty years after those wonderful little computers were put out. When all of the money is pouring into the pool from a thousand outlets around the country, and half of the bets are placed within the last 45 seconds, and there are delays in aggregating those bets and merging them into the pool, we now have the odds changing during the running of the race. Honestly, there is nothing criminal going on, but it looks terrible! When a horse breaks out of the gate and immediately takes a five length lead, it looks very suspicious when his odds keep dropping from 6-to-1 down to 2-to-1. It looks like they forgot to shut down the machines. Most of my personal betting is on multi-race bets - a Pick 4 or Pick 6. I play them in advance, so I don't encounter the last-second changes to the odds. It is a problem for people who bet primarily to win. They will wait with great discipline for a horse with attractive odds, and they place their bets at one minute to post, and suddenly during the race the odds will change so much that he will have become a bad investment. I hope that the industry will buy some real computers soon.

Q: You told a story about Smarty Jones. Is there a way to short him in that situation?
A: That is what I effectively did by dutching the rest of the field against him. There is no more direct or efficient way to short a horse in this country. There is a company in England called Betfair which is trying to become an international online bet-maker by matching up people. I would go on Betfair and offer 3-to-5 odds on Smarty Jones. Someone else would take that bet online. Betfair would match us up, and they take a 3-5 percent takeout rather than the traditional 20 percent. Bettors love it. Race tracks hate it because they get nothing out of it. So far, the American racing industry has managed to keep Betfair and other online arbitrage systems out, but I don't know how long they will be able to do that. Perhaps the tracks will come to some kind of agreement with Betfair, and the takeout will have to go up. The other thing that the industry does not like about Betfair is that they don't like giving people the opportunity to put up a proposition against a particular horse. What if that guy is the owner or trainer of the horse? It could look really bad if one of these people is stiffing their own horse and trying to cash a bet with it online. It looks a little unsavory. I wouldn't be surprised if we ended up with tools like that to bet against an individual horse.

Q: Seabiscuit has been very popular in the media recently. What is your take on Seabiscuit?
A: The Seabiscuit phenomenon is a lot like the Smarty Jones phenomenon. The book that Laura Hillenbrand wrote about Seabiscuit was a really good book and an excellent historical novel. More people saw that terrible movie than actually read the book. That movie ruined her book, and it told a lot of lies. Like with Smarty Jones, it pretended that Seabiscuit was an ugly, scruffy horse from the wrong side of the tracks who was really a gallant warrior. He was a purebred blue-blood. He was one of the best-bred horses of his generation. He began his life in a fancy stable. They didn't throw him away because he was humble. They sold him at a profit! It was a perfectly legitimate, big-time transaction - one rich guy selling a race horse to another rich guy! There were no emotions involved. In 1999 and 2000, lots of people created lists of the top fifty racehorses of the 20th century. Seabiscuit was not in anyone's top fifty. He was a nice horse, but he was nothing special, not that you would know that from the movie. In the climactic race of the movie, Seabiscuit comes from thirty lengths off the pace to win after the two jockeys stop and have a conversation in the middle of the race. In the actual race, Seabiscuit led every step of the race. If someone made a movie about Babe Ruth and had him hitting 150 home runs and shooting down space aliens, the public would cry out, "You can't make a biography like that!" Somehow, when it comes to horse racing, though, it's perfectly okay to make it all up.

Q: What advice do you have to people who are novices at the track?
A: Don't bet on favorites. If you are a novice, try to figure it out for yourself. There is no fun in having someone like me tell you to bet on the number six horse because I think he is a good value. So what? You may win $4. If you take the time to learn how to read the Daily Racing Form and then you discover a value in the odds and your horse wins, that is the great fun of this activity. If you watch horseplayers rooting a horse home, they are never saying "I'm gonna win $1000! I'm gonna win $1000!" They are saying "That's me! That's me! That's me!" That is the fun. You get to feel smart for thirty seconds before you lose your next bet. Pick your own horses. Don't take short prices. Have some fun and try to get lucky! Or put ten years into it and try to actually win.

Q: Do you have any comments on Silky Sullivan or his brother Satin Sullivan?
A: Silky Sullivan was really popular for two reasons. First, he came back from 100 lengths out of it - people always love that. Second, he was one of the first television horses. There are not that many of us old enough to remember this, but the first ads for TV sets all included a picture of a horse race on the screen. That seemed to be the thing that would sell televisions - "Wow! Animals in my living room!" Horses look good in black and white. Native Dancer, one of the first TV horses, owed much of his popularity to the fact that he was gray and he showed up very well in contrast on black and white TV sets.

Legg Mason Capital Management ("LMCM") is comprised of (i) Legg Mason Capital Management, Inc., and (ii) LMM LLC.
The comments, opinions and any forward predictions presented about any particular security, the economy or "the market" are based on the analysis of the speaker. These are not necessarily the opinion of, and should not be construed as a recommendation on the part of Legg Mason Capital Management or any of its affiliates.


Bronze Contributor
Read Millionaire Fastlane
Sep 15, 2007
Colorado Springs
Good stuff... Sports betting is so similar to investing. Recognizing value is key... Sticking to hard numbers and probabilities... Knowing when to bet and when not to bet are important principles.

I see Green Bay is only -8 to Seattle this weekend... I see a couple points of value in there ;)


- Hakrjak


Bronze Contributor
Speedway Pass
Jul 26, 2007
Hmm. So my theory of putting money on the horse who takes a crap right before the race isn't the best way of going about it?

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