What’s common between Card counters, Baseball, and Stock Trading: A Modern-day Blueprint for the American Dream.

As a 21-year-old senior at Vandy, my friends and I made well over six figures through sports betting. We did this with no emotion. The only value in the outcome of the bet was financial. No extra joy from seeing a Patriots team lose or a Phillies team win. I mention this as it will become essential later in this post.

To make money in sports betting, we used statistics. Not complicated combinatorics or hypothesis testing or anything an 8th grader couldn’t understand. I was the only one to ever touch math beyond calculus. (This should make me rethink my degree, but we leave that for another time) We used statistics to identify edges, or places where sportsbooks were making mistakes, and when they made a mistake, we would bet big to punish them. To quote the famous Moneyball, “we were in essence, card counters, at a blackjack table”.

I mention this as motivation for the posed question: “What’s common between Card Counters, Baseball, and Stock Trading?”. Now the answer to this question is not unique. One could say, all three occupations are heartbreaking and have big potential for a massive loss. One could also argue that all three occupations are very profitable and can provide generations of wealth. But, my answer to this question is rooted in historical changes. Over the past 4 decades, all three of these occupations have seen incredible shifts in their approach. In the late 80s, card counters shifted to using mathematics to identify edges in the casino. In the late 80s/early 90s, Renaissance Technologies (a firm you’ve probably never heard of), developed the Medallion fund. This fund, to date, is the most successful quantitative trading fund which on average has generated 49% returns compared to the S&P 500 9.7% returns over the last 4 decades. Lastly, baseball. Bill James published a book so influential to modern-day baseball and yet many do not know his name. Now, modern-day baseball teams are built from statistics - not scouts' opinions. Moneyball, the movie, widely publicized this shift and is an excellent watch. But how many people know that this was originally a book by Michael Lewis? (Excellent author, also wrote The Big Short and would highly recommend The Undoing Project).

There are three points here. The first is that the modern world is about math - more specifically statistics, not emotion or gut feeling. The second is there is a clear lack of knowledge about statistics, its history, and its wide array of applications. Lastly, and I hope I provided a short answer to this question already, why would anyone learn this stuff? I want to explain a few things for the rest of this post. First, a basic overview of what statistics are important. Secondly, I want to provide a simple blueprint for making money through hard work - the modern American Dream in essence. Lastly, I want to explain the mental approach required to successfully implement this blueprint.

For some, the answer to the main question in this blog post came naturally. I would assume, for those folks, risk, and expectation are already understood. However, for many of us, these concepts are not explained and therefore I will explain them here.

One of the most potent concepts in modern-day applied math is incredibly simple. This concept, denoted expected value or EV, is a simple formula that takes a series of outcomes, and computes the expected “value” over all the products. To compute this, it takes the value of the outcome (i.e. in blackjack the payout, in baseball the number of wins) and multiplies it by the probability of that outcome occurring. For example, say we have a coin and heads are worth 2 points while tails are worth 1. I hope we can agree, in a fair game, there is a 50/50 chance of flipping heads or tails. Therefore, we can compute the expected value as EV = Value of Heads * Prob of Heads + Value of Tails * Prob of Tails = 2 * 0.5 + 1*0.5 = 1.5. Therefore, after one flip of this coin, we would expect that our score, in the long run, would be 1.5 points. Naturally, we can then take advantage of this by placing a bet to say that the value of our score after 100 flips would be > 145 (Because we expect it to be 1.5*100 = 150). If we have bad “luck” we could roll many tails and our score will be less than 145. So a challenging question arises. How often should we win? This question naturally influences how much we should bet. This is the concept of risk and it depends on the variance in the problem. This leads us to something called the Kelly Criterion, which provides an understanding of how to bet to maximize wealth when the outcomes are known. I would highly recommend the reader look into this model on their own time as it is slightly more challenging to understand than the Expected Value. However, I emphasize that any 8th-grade student could still understand the concepts.

Ok, so we now have a small understanding of the expected value and how we can bet with it. Now, I want to explain the application of this concept. Poker, another gambling game, has transformed over the past 5 years. People have learned what the right decision is to maximize their expected value and therefore their wealth in the long run. But, at the lowest levels, this shift has not been implemented and therefore there is plenty of money to be made. This is my blueprint for the modern American Dream. To win in the game of online poker, one must dedicate hours upon hours of hard work, but it is very reasonable to win large sums of money (10k monthly) on just this hard work. To enact this, one must learn to emulate a “solver” or a computer that tells the player what the correct decision is at each point in the hand. Additionally, poker was originally and still is a game of mental stress. One must play without emotion, understanding that their strategy can experience stretches of loss, but in the long run is profitable. The point is anyone, despite their “talent” for math pr their “skill” in marketing or even their parents' affluence can become wealthy by playing and spending time studying poker. Now, the question is who wants to spend thousands of hours watching Youtube videos and studying solvers to make very little in the beginning? Well, that’s up to how badly you want to become wealthy.

Now, I can see that there are many objections to my above paragraph. In essence, I claimed if you work hard at poker, you will become wealthy when obviously life is not so simple. You need to do a lot of other things right such as keeping your costs low, managing your money well, and maintaining your focus. However, I want to emphasize this approach as a reasonable way to generate large amounts of wealth that require very little beyond hard work. To handle the confounding factors, I would suggest using the power of YouTube and the internet to learn good financial habits.

Additionally, it is important to maintain a specific attitude to generate wealth. I think a sense of self-ownership is essential. That is, if you make a mistake, it is on you. If you don’t study a spot or manage your money correctly, it is on you. If you are still struggling from mistakes you made in the past (ie debt, poor credit, etc.), it is on you. In this blueprint, there is no job security or manager to come and help you. This self-independence is required to enact the discipline and focus needed to build long-term wealth. However, playing poker inherently is taking a risk and there is a lot to be learned for going against the security provided by so many jobs in society. Lastly, you must build emotional tolerance. That is, you are self-aware enough to avoid tilt, handle massive downswings, and ultimately deal with the stress of winning and losing even when you are doing anything correctly. If you can keep a good mental focus, and work hard consistently, I promise this is a modern blueprint for the American dream.