Geoff Gannon January 1, 2008

Steven Crist On Finding Mispriced Bets

Lincoln Minor of Reflections on Value Investing links to an excellent talk given by Steven Crist of the Daily Racing Form at the Legg Mason Capital Thought Forum.

This is a great talk. Anyone interested in investing should read the whole thing at least once.

Read Steven Crist’s Talk at Legg Mason Forum

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… 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…. 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…. 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.