Trading and Betting the Horses While some people question how easy it is to make a consistent living TRADING, how about making a consistent, comfortable living betting on horse races? Here is a story about Ernest Dahlman – someone who has experienced amazing success at betting on horses for the past 35 years. Some of the principles that have contributed to E.D.’s success are the very same applied by top, professional traders. The following includes excerpts from a June 3, 2001 article titled THE WIZARD OF ODDS, published by the New York Times and written by William Grimes. We recommend that before you read our story you read the original article in its entirety. It is necessary to register first on the NY times website. They will have the article freely available only until June 10. This Wizard of Odds, “Ernest Dahlman, may be the world’s most successful horse bettor. The reason he’s so good is that he doesn’t gamble.” But, according the article, “in a busy year, Dahlman might bet as much as $18 million.” Let’s look at some of the main principles that contribute to Dahlman’s success and see how they are transferable to trading. Dahlman narrows his playing field. He specializes primarily “with races at tracks in New York and California” where he perceives himself to have a larger edge. This way, he can become familiar with the subtle nuances such as local trainers (in whose hands a horse can experience a “religious conversion”) and track conditions. A trader will do best to concentrate on a select “stable” of markets and learn their individual personalities, than to jump into markets or individual stocks that have not been thoroughly researched. Dahlman specializes in a very specific type of bet – the exacta, his “bread and butter.” A trader will do best if he specializes in just one style or pattern or trading methodology. Know the risk/reward characteristics of your individual technique. Dahlman chooses what would at first glance appear to be a high risk technique, but one which offers good rewards. Dahlman pays more money to minimize his risk. He hedges his bet by creating a box (“twice as expensive as a straight exacta” but which “lets Dahlman have things both ways”). Successful top traders are far more interested in strategies by which to minimize risk than those that go for the big gains. Stops, protective options, or spread strategies are just some of the ways to minimize risk. Be a “plodder,” a nickel and dimer. “On average, (Dahlman) says, he earns 3 or 4 percent on his investment.” He never bets serious money on long odds. Stick with the high probability setups. Don’t try to hit home runs. “The point is, there’s no such thing as a sure thing. Favorites win only a third of the time, an immutable racing statistic. Even successful bettors tear up more tickets than they cash. The trick is to cash enough tickets, at the right odds, to offset the losses and turn a profit. That’s where addition and subtraction come in.” Know the seasonalities of your game. “‘Winter is my favorite time of year,’ he said cheerfully. ‘It’s more predictable. The horses tend to be older, and you know what they’re going to do. And out in Northern California it rains, and you get a lot of grass races switched to the main track, resulting in complete mismatches.'” If you are a grain trader, there are distinct times of year when volatility increases. If you trade options, there has historically been a strong tendency for volatility to contract going into the summer – good if you are a short premium player, bad if your game favors a momentum style. Do you do best at the beginning of the year or the end of the year? Know the cycles in both your game and yourself. Do your daily homework. “Most horseplayers love a contentious 12-horse race with the promise of three-figure exactas and monster trifectas. Not Dahlman. ‘Anyone who knows anything about gambling will tell you I’m not a great gambler,’ he says. ‘What I’m good at is arithmetic. I can add and subtract.'” “Like many other professional horseplayers, Dahlman relies in part on the work of others. The Daily Racing Form gives him a compressed description of the last dozen races run by each horse entered in a race. That merits a quick glance. The more serious numbers come from ‘the sheet'” … which analyze and quantify… “a variety of factors, ranging from track resiliency to wind direction to the distance actually traveled by each horse.” He considers his detailed record keeping to be his biggest edge. What type of detailed record keeping do you maintain with your own trading? Specialize, Specialize, Specialize! Who would have ever thought of specializing in Dahlman’s “overriding preoccupation, horseshoes? Years ago, Dahlman began noticing something funny about horses equipped with mud calks, cleats that some trainers use for extra traction when rain turns dirt into mud. Dahlman noted that even when rain failed to materialize, a lot of horses seemed to improve several lengths when wearing mud calks for the first time” It’s also another “reason he loves Golden Gate Fields, near San Francisco. It rains a lot there, so plenty of mediocre-seeming horses are switching to mud calks for the first time and then sneaking into exactas at good prices. A second reason for loving Golden Gate is that the track posts very detailed shoe information before each race.” Find your niche! Believe in your own game and don’t listen to anyone else! Although “Dahlman accepts as highly accurate … the raw speed numbers,” he rejects “other assumptions in the sheets.” Others dismiss Dahlman’s horseshoe theory. It does not matter who thinks your style is right or wrong … all that matters is that you believe in it yourself and follow it consistently. Keep your losses at the sleeping level. In the best quote from the article, “If I keep my losses at $7,000, I can sleep easily,” Dahlman says. “I can get that back in one race.” Your sleeping level may be different from anyone else’s. Here is a person who has managed to keep a balanced life and raise 6 children while still maintaining his passion for the horse racing. As the game changed, from trotters to thoroughbreds, he was able to adapt with the times. We have seen many games come and go in the markets, from equity options arbitrage to the disappearance of SOES traders. We have seen markets change from a momentum environment to a trading-range game. A trader must specialize in one thing yet be ready to recognize when it is time to learn a brand new game. Recognize that Dahlman built up a lifetime of racing knowledge. He relies on that experience to interpret the incredible amount of information he gathers. For newer traders just learning to make their way in this business, recognize that, ultimately, experience is the best teacher. Every day that you trade, you gain experience. Keep the discipline, keep the faith. To repeat one last quote: “It’s an art with just enough science to make it possible for a very tiny percentage of bettors to take money away from the herd of less disciplined bettors.” Trading? or betting the horses? Linda Raschke LBRGroup, Inc.