The Casino Portfolio
Money management, strategic calculus and discipline can equal long-term profit in the gambling game
From the Print Edition:
Jeff Daniels-The Newsroom, July/August 2012
In 2004 a British gambler by the name of Ashley Revell sold everything he had, did what he could to raise additional funds and eventually cobbled together a total of $135,000. In a highly publicized gambit, 32-year-old Revell flew to Las Vegas, went downtown to the Plaza Hotel & Casino and bet it all on a single spin of the roulette wheel. He wagered on red. Considering the zero and double-zero, he was getting less than even money and was clearly reckless. The ball spun around the wheel, bumped in and out of a few slots and miraculously landed on a red 7. Revell doubled his money, and—much to the chagrin of management at the Plaza—did not make another bet. Instead, he used the money to finance an online poker site, pokerutd.com. It launched in the U.K. (where online poker is legal) and remains in business today.
Things worked out for Revell. But suggesting that you risk it all on a spin of the wheel is patently bad advice. However, there is reasonably good advice for people who are inclined to gamble and might be looking for an alternative to alternative investing. After all, the stock market has been fairly lackluster for the last dozen years (as this story closes, the S&P 500 hovers around its March 1999 high). Considering that, what would happen if you took the money that you would ordinarily use for speculating the market and instead invested it in forms of advantageous gambling?
With tutelage, discipline and proper money management, it’s possible to turn a long-term profit at sports betting, blackjack, poker and fantasy sports. Of course, such an endeavor is not easy and requires work, but for certain people—those who are inclined to gamble anyway—it’s not necessarily a bad idea. “Gambling is an interesting way to make money, but it’s more of a part-time job than an investment,” says Aaron Brown, a risk manager at AQR Capital Management and author of The Poker Face of Wall Street, a memoir that includes details on his days playing high-stakes poker. On the upside, he adds, “The feeling you get from gambling where you have an edge and you are the house is great. It is completely different from playing a game where you expect to lose.”
He points out, though, that there are certain personality types who will be likelier to succeed than others. “You want to be the person who gets energized when things go against you and the kind of person who keeps an even keel when things are going well.” In other words, once you learn how to beat the gambling game, you have to beat the mental game—the one that can easily derail you from following the proper strategies or making the right bets due to short-term fluctuations. Brown cautions that those who do possess the proper qualities are a limited breed: “I’d say that 80 percent of the people who [attempt to become advantage players] don’t do the work to learn the game and they don’t have any kind of shot.” Of the 20 percent who develop the skills, estimates Brown, 80 percent of them lack the proper money management abilities. “The inevitable downswings are hard to deal with psychologically. You need to have faith in yourself. That requires rare skills. It’s why casinos earn money.”
But if you can make it work, it’s a fabulous way to generate extra income, which can easily surpass the 8 or 9 percent that Wall Street historically returns for investors each year. Besides the money, there is also the lifestyle that comes with being a frequent gambler of elevating stakes. As cheekily put by Nathaniel Tilton, a financial advisor who managed to successfully crack the secrets of blackjack, “One of the major perks of casino gambling is that hosts are always giving you free cigars. Conversely, when you invest on Wall Street, whether you make money or lose it, nobody sends you to shows and buys you dinner.”
Nathaniel Tilton, financial advisor by day and casino-crushing card-counter on nights and weekends (he’s elusive as to whether or not he remains in the gambling trade), serves as living proof that you can keep a day job, learn to count cards and live the life of a professional gambler when it suits you. Tilton, whose recently published memoir is entitled The Blackjack Life, backs up Brown’s belief that gambling part-time cannot be a halfway enterprise. “You need to go all in and be completely devoted to doing everything right,” Tilton says. “You need to be perfectly bankrolled and perfect each step of your play. The advantage you strive for is so small that if you give it up on any level, it’s hard to win.” It should be noted that he and his partner, identified in the book as D.A., started with $15,000 and initially ranged their bets between $30 and $180.
Perfect card-counters play at maybe a 1.25 percent edge on money churned through per hour. So if your average bet is $100 and you can get in 100 hands per hour, your expected return is $125 per hour over a long period of time. In the short run, however, profits and losses can be all over the chart. Therefore, Tilton explains, “You need the fortitude to know that the results will be there as long as you can apply the craft over and over again.”
Tilton and D.A. learned to play by taking private lessons from MIT blackjack team superstars Mike Aponte and Semyon Dukach (on separate occasions). Before they played a single hand in the casino, Tilton and D.A. put themselves through rigorous practice sessions and tests. First they learned basic strategy, which is the standard way of playing every possible hand and it brings the casino advantage to below 0.5 percent. Once that was rock-solid, they turned to card counting. (It involves watching all the cards that are dealt and giving values of 1, 0, or negative 1 to each exposed card. This tells you how advantageous the coming hand will be and dictates the amount that you bet.) And finally, they memorized over 100 deviations to basic strategy that are based on the count. For example, you would not normally double down on 9 vs. the dealer’s 2. But if the count is 1 or higher, Tilton and his partner would. Perfect all of that, employ techniques to mask that you are card counting (Tilton outlines a variety of these in his book) and you’re off to the races.
During their first year, Tilton and D.A. doubled their bankroll. Within three years, supplemented by small infusions of their own money, they built it up to six figures and raised their betting spread along the way. Despite the success and the fact that they could have ramped up the hours and maybe gone fulltime at blackjack, they always maintained their day jobs. Tilton viewed blackjack as a profitable hobby that made life interesting and, thanks to a plethora of casino comps, allowed him to live fatter than he ordinarily could. “You get to go away on weekends, stay in nice hotels, get great fight tickets and challenge your mind,” he says. “There is something nice about leaving behind your everyday life on a Friday afternoon and entering a new world at McCarron Airport where a limo driver waits for you. The experience of that is indescribable.”
Fantasy sports are popular. So popular that the Fantasy Sports Trade Association estimates 32 million people played in 2010, creating a $3 to $4 billion impact across professional sports. On the surface, fantasy football sounds pretty simple: a dozen or so guys get together, kick in a predetermined amount of money and draft NFL players onto fantasy teams. You get points based on each player’s performance. Whoever has the most points at the end of the season wins the money. It doesn’t matter whether or not a particular team wins (though that can help); it matters how the individuals that you have drafted perform. The majority of people involved in fantasy football view it as an adjunct to their regular betting and figure that they’ll win if they get lucky. Chad Schroeder, who’s taken down close to a million dollars over the last five years of playing fantasy sports, views it more like stock investing. He plays in multiple leagues and puts together what he hopes will be a balanced portfolio with some investments that have high-risk/high-reward components built into them.
The first thing he points out is that there are different kinds of leagues and money needs to be allocated in a smart way. Some leagues comprise just 12 participants; they’re relatively easy to beat, but your return on investment is limited. Other leagues are composed of hundreds of participants; acing one of these events will require a good team that has been specifically designed to win big or die trying, and a fair bit of luck, but the payoff can be well into the six figures. If, let’s say, you have $12,000 allocated for fantasy football, here’s how Schroeder suggests investing the money: Spend $2,500 on entering a high-stakes national contest, put $1,050 into three national contests that have buy-ins of $350 each, and $1,500 into one more national contest. The remaining $4,950, he says, should be allocated for 12-man leagues with entry fees that range from $500 to $1,000. He suggests playing via the sites myffpc.com, nffc.stats.com and fulltimefantasy.com.
In terms of putting together teams, Schroeder recommends a two-tiered approach. For your 12-man leagues, go the blue-chip route and look for a strong, balanced portfolio of players. That is, he suggests spending your draft allocation (each team starts out with a set amount of theoretical money that can be applied toward buying players, just like in the real NFL) in a quest for value. Just as you shouldn’t overpay for Google simply because it’s Google, nor should you do the same with an NFL star. “Let’s say I like Ryan Matthews,” says Schroeder. “And let’s say he normally goes in the middle of the second round. Even if I am targeting him, I will not push him up to the beginning of the second round.”
When picking players for the big, national contests, Schroeder recognizes that the upside can be tremendous, and for that reason he suggests forgetting about balance. Think of it as playing the World Series of Poker main event, going for a win, and recognizing the need to have an aggressive end game. It’s a swing-for-the-fences approach where you increase your likelihood of either flaming out miserably or having a heroic shot for the gold. To achieve that, he says, “Focus on choosing explosive players.”
They either soar or fizzle. “Fast players, like Mike Wallace, are the ones who I consider to be explosive; but they’re also streaky,” says Schroeder. “They run a lot of deep patterns and you never know when they will be connecting.” If you go deep in a big fantasy league, “the hope is that they will be connecting in week 14. It gets really competitive, and you need to take the kinds of educated gambles that allow you to keep scoring points. You can enhance that”—but also increase the risk—“by having a wide receiver and quarterback who play together. It’s a way of doubling up.”
Sometimes, Schroeder points out, the best advice is the most obvious: “Too often, people get hung up on worrying about match ups and how somebody did the week before. I simply go with the players who I think will score the most points and don’t worry so much about short-term results or who they’re going up against.” In other words, he explains, “Avoid over-thinking things and making them more complicated than they are.”
On a Friday evening in the Bellagio, card-playing guru David Sklansky sips from a cup of coffee and discusses what it takes for somebody to systematically learn to win at the game of poker. One of the first things he points out is that you need to find a game that you can beat. Often that means looking beyond standbys such as Texas hold’em. The goal, explains Sklansky, would be to get good at a game that hasn’t become so popular that everybody else has already figured it out. To that end, he suggests focusing on seven-card stud. It’s spread in many casinos but never grew into the media darling that hold’em is. Hence, it lacks the massive following that leads college kids to, as Sklansky puts it, “learn to play the game in a completely unexploitable way.”
Luke Kim, who graduated from Wharton and worked for an investment firm before turning to poker full-time, spent years as a winning player who supplemented his 9-to-5 income with proceeds from the game. Though Kim says that good players can still find value in live ring games of Texas hold’em, he went the Sklansky route once he decided to play for a living. It was at a time when online poker was thriving in the United States and, rather than trying the popular six-handed variant, Kim
focused almost exclusively on playing heads up.
He taught himself by getting lessons from the game’s most adept practitioners. “I railed the best players online,” he says. “I recognized who won the most money and watched how they did it before I played a single hand. I ramped up my aggression and looseness levels to what the best players were doing, even if it seemed unnatural. The style worked for winning players, even when they didn’t have hands. I learned that, on the whole, the best players play aggressively. In poker, to be aggressive is good.” Kim got his lessons via PokerStars.com, a website that is no longer open to Americans. Those who want to learn by watching can now sign up with smaller sites like CarbonPoker.com, where Americans are can play and observe in order to glean tips from more experienced players.
And while online poker is currently a darker shade of gray than it was two years ago (the biggest potential downside is that you’ll deposit money and have a hard time collecting your winnings), Kim advises to keep the deposit as small as $100, play for low stakes, and view the whole thing as a learning experience for live stud games in the casinos or online after it is legalized in America. “When you play online, it’s easy to analyze your play and put in a lot of hand volume; it can take just a few months for you to get good,” says Kim. And if you don’t get your money out? Kim answers with a question: “How many things can you get good at for just $100? Think of how much it would cost for you to get good at golf.”
Once you do start playing, think of poker as an entrepreneurial undertaking—one in which you strike out in regions where the competition is soft. And remember the importance of operating within your budget. “I never like to have more than 10-percent of my bankroll at risk at any given time,” he says. “You have to remember that no matter how big your edge, you will lose some percentage of the time.” But if your luck curve happens to start in the opposite direction, advises Kim, keep it in perspective. “I made $20,000 during my first month of playing $20/$40 poker,” he remembers. “I figured that I would make a quarter-million dollars per year, no problem. But then I learned that things don’t work that way.”
Is it possible to make money by betting sports? Of course. An elite coterie of gamblers earns serious cash by outfoxing bookies around the world. How do they do it? “They devote their lives to it. It’s a full-time job,” says Anthony Curtis who already has a full-time job in the publishing industry. “Most people, on the other hand, don’t know what they’re doing, and they bet into what are essentially even money propositions, laying $11 for every $10 that they can win [that 10 percent is the vigorish or betting commission paid to the bookmaker for taking your action]. The number has been hammered into place, to where it is supposed to be. An average guy can’t win over time.”
But, Curtis points out, he and some friends have found a way to make money without doing a whiff of handicapping. He calls it shopping for numbers. I prefer the catchier scavenger betting. Either way, it’s simple to implement, and they did it for much of the last football season. (Due to the time commitment, Curtis is not sure that he’ll be doing it in a serious way this year.) “You look for lines that are out of whack with the rest of the marketplace,” he says, suggesting that you can use pinnacle.com (an offshore sports betting site that takes no business from Americans but allows us to look at its rock-solid point-spreads) as a benchmark. “If somebody hasn’t gotten the memo, you can take advantage of them.”
Best of all, you don’t need to know anything special about the sport. You’re just looking for bookmakers who are either desperate to balance their books or incongruent with the rest of the world. “We’d make bets on things like Swedish handball or Aussie rules football. There was no handicapping or second-guessing,” says Curtis. “It was only about finding inefficiencies.
During the NFL play-offs, we’d have six or seven prop bets per game. For example: Will Manning throw over or under a certain number of interceptions?”
Hearing this, I make the mistake of figuring that it would be virtually impossible to predict the number of interceptions thrown. Curtis replies, “You have it backwards. You want to believe that the market as a whole does know, and they can put a really good number on it. Then you find the guy who doesn’t have that number. You do a ton of shopping and make a ton of bets, and if you like this sort of thing it’s a lot of fun.”
Curtis estimates that his edge was 3 to 7 percent, and he figures that a starting bankroll of $10,000 is plenty. Like most gambling, though, this can be swingy, so you need to be willing to withstand losses without altering your strategy.
Additionally, he says, the continual hunt for fresh betting outlets can become a grind, and you want good reasons to believe that you will not get stiffed by the many bookies you must invariably deal with. On the upside, it’s a lot slower—and therefore financially safer—than day-trading or casino gambling, and the edge is strong enough that you can make some mistakes and still maintain an advantage. “Plus,” he says, “it’s a hell of a lot of fun, you get to sweat all these games and you have the best of it. It’s the hobbyist’s way of beating gambling, and I know it works.”
Michael Kaplan is a Cigar Aficionado contributing editor.
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