Invest Like a Pony Gambler

We are just finishing up the Triple Crown season, and as always, I played along at home trying to pick some winners.

I had the Derby winner, but that was pretty much the only bet I liked in the three races this year so we can put 2017 in the win column.

I do not go to the track much these days, but before I got married in 2010 I always took at least one trip down to Lexington, Kentucky to take in some racing and I was no stranger at the local OTB lounge. The place had a full bar, a decent kitchen and you could bet on races all over the country. It was the perfect place to spend a rainy afternoon.

I first started taking in the races as a teenager. My father had a friend who was the classic Irish bachelor.

Denny lived in a row house on 33rd Street in Baltimore with his widowed sister, right across the street from the old Memorial Stadium, and his life was comprised of ponies and baseball.

Six days a week he took the bus to either Pimlico or Laurel to take in the races, and I occasionally tagged along.

At the track, Denny would read the racing form and he was right more than he was wrong about which horse would come across the line first, but he rarely bet.

I asked him why he didn’t bet more often and he said something I never forgot. “It is not about being right about just the horse, young man. You also have to have the right price.”

He only bet when he had the horse he liked at a price he liked. Most of the time he didn’t get that combination, so he just read the paper and drank coffee with his buddies.

It is worth mentioning that horse racing was his primary source of income because of that discipline.

The Two Types of Investors

The stock market works like that as well.

It is not enough to just pick a good company. To make big money, you have to find a good company at a great price.

You can buy the best company in the world, and if you pay too high a price, you won’t make as much money as the more disciplined investor who waits to pay a better price for the company.

In my trips to the track I learned that there are two types of bettors who lose pretty much all the time. The first only bets on favorites all the time. They will pick the horse with the best odds 100% of the time. On average, they will win about 35% of the time but because the payout will be so low because of short odds (bad price) they will go usually go home with less money in their pocket than they had at the start of the day.

The other losing bettor is the action junkie. This gambler makes lots of exotic bets using different combinations and long shots hoping to hit the big one. Although they may hit a big winner once in a blue moon, the wins will likely never equal the losses and the right horse, right price crowd and the track end up with most of their money.

I have observed the same two people in the stock market over the last three decades, and the results are similar.

The favorite buyer who buys the favored stocks of the day with no attention to price is never going to make as much money as the price and value conscious buyer. Paying too high a price pretty much guarantees subpar results over time.

The action junkie fares as poorly in the market as he does at the track. Trading too much is the biggest sin for individual investors and constantly taking small gains is never going to be enough to offset the inevitable losses. It runs contrary to our “do more and work harder” hard wiring, but in the stock market you make more by doing less.

To win at the track you have to wait for that unique combination of the right horse at the right price. My father’s friend Denny would go to the track some days and never reach in his pocket to make. Other days he might make several bets. He was willing to wait until he had exactly the situation he wanted and the price that put the odds in his favor. As a result, he is one of the few winning pony players I have known in my life.

We need to invest like Denny bets on horses:

  • Wait until you find a company that has significant social, demographic or economic trends providing a tailwind.
  • Make sure they have the financial strength to survive any storms that may come along.
  • Then wait until you can buy shares at a valuation that puts the odds in your favor.

This combination will not be available every day. It won’t even be available on most days.

But that’s OK. If there are no stocks with the right combination of good company/great price, go about your business and live your life.

On the days that you find the winning combination then buy the stock and sit back and let time and value do the work of providing market-beating returns.

Tim Melvin

Written By Tim Melvin

As a 30-year veteran of the financial services and investment industry Tim Melvin served as a broker, advisor, and portfolio manager. He’s combined this nearly three decades of experience with a love of value investing in order to help investors worldwide to multiply profits and build their nest eggs. As an avid value investor, Tim...