Crist on Value: Stock and Horse Handicapping Strategies
Summary of "Crist on Value", Steven Crist's chapter on his horse handicapping strategy
In this interview with MOI Global, Michael Mauboussin recommends this chapter from the book Bet With the Best: Expert Strategies from America’s Leading Handicappers. Michael says that he distributes this chapter, titled “Crist on Value”, to his students each year to read for the class he teaches at Columbia Business School.
This chapter isn’t just about handicapping horses, it is a framework on how to handicap undervalued assets, especially stocks.
Here is my summary below:
“The problem with this line of thinking is that it suggests betting is some small component of the game, which is like pretending that putting is a minor part of championship golf. In fact, if you handicap well and bet poorly, you’ve failed. It’s as useless as crushing your tee shots while three-putting every green.”
- Steven Crist
Handicapping well and betting poorly is analogous to being good at analyzing companies to determine which ones will do very well over the ensuing decade, but failing to pay attention to valuation metrics. This will lead to paying too much for a stock based on future revenue/earnings growth and valuation multiples.
This tweet from Charlie Bilello on Twitter’s stock post IPO to today is a good example of not understanding how to handicap using valuation metrics:
Pure handicapping is only half the battle for winning at horse races. The other half consists of betting strategies and money management. The second half of the battle is important because it has to do with making money and it isn’t much good if you are really good at handicapping horses but you can’t make any money.
Handicapping the competition, probability and odds, and using multiple bets to improve your prices are three ways to solve this problem of helping the handicapper focus on profit rather than prediction.
The odds of winning a horse race are determined by the amount of money bet on each horse. The breakage and track takeout further reduces the profit even more.
The odds, in other words, are what determine if betting on a horse is a good or a bad bet.
“The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual changes of victory.”
Value = probability x price
A 10:1 bet on a horse is a bad bet if his true chance of winning is only 5 percent, but it is a great bet if his true chance of winning is 15%.
Every bettor is playing against every other bettor at the racetrack.
The author mentions that the opportunity for profit at the racetrack consists entirely of mistakes that the competition makes in assessing each horse’s probability of winning.
It’s ok to pass on a race because there isn’t any value in it. And it doesn’t make sense to play bets on a race when you have no confidence in your own odds line.
Multiple wagers can be an additional opportunity to profit for the value-oriented bettor. One way to do this is to place multiple bets which reduce takeout and thus give the bettor “free” odds on additional horses or races.
Here is Steven Crist’s summary:
“1. Recognize the difference between picking horses and making wagers in which you have an edge. The only path to consistent profit is to exploit the discrepancy between the true likelihood of an outcome and the odds being offered.
2. You are playing against only the other bettors at the track, not against the game or the house. Although they do a pretty good job on the whole, your opponents make more than enough mistakes for you to win.
3. Multiple bets can make apparently valueless races highly playable, and can multiply the existing value in a race because of the opportunity to capitalize on more than one discrepancy on the board.”