A Dash of Insight: The Card Counter: What an Investor Can Learn from Blackjack

To begin with it is important to understand that investing is not gambling. Having said this, the lessons about overall chances, risk and reward, and discovering winning methods are relevant to many investment situations.

Games of chance have been studied extensively. The odds are known. The chances of winning have been calculated. The best strategies have been documented both in popular literature and by serious economists.

Background

Many years ago, preparing for a holiday in Las Vegas, we decided to study blackjack. There were some good computer programs. One could learn a system, practice on the computer, and prepare to play. For someone with a quantitative bent, it was not that difficult. The method, briefly put, is straightforward. If the remaining cards in the deck have extra tens, face cards, and aces, the player has an advantage. If many of these cards are gone, the player has an extreme disadvantage. By “counting” the cards, one can determine whether the situation presents a positive expectancy. The player increases his bets in the favorable situations. The Ken Uston book, Million Dollar Blackjack, on our reading list, shows how to do this, and also has a lot of useful advice on money management including the Kelly Criterion.

We had a few adventures, winning some money and a couple of tournaments. Since our stakes were low, we played below the radar screen of the casinos. We always chose tables where there was a bigger player of greater interest to “the pit.”

We proved that we could beat the game on these terms. It was fun for a while, but generally boring work, so we moved on.

"Consulting"

Others knew of this skill and occasionally enlisted our help. These are a few (of many) true stories.

Player #1

We were asked by someone to evaluate the play of his friend who had a large stake from a recent big score on a horse race. Quietly we moved behind the table, unnoticed by the player. We watched him move stacks of black chips, playing one to three hands at up to $500 per hand. The player was following a pattern. If a lot of small cards hit on one deal, the player would make big bets on the next. The player was misinterpreting data, information which told only a partial story. He was failing to use an overall quantitative model. Frequently the small cards would hit because there were many small cards left. The player bet big and lost heavily by misreading the information in front of him. We reported to our friend, but he could not prevent the player from losing all of his money.

Player #2

A second player followed a simple rule: Avoid the hot dealer. Whenever the dealer drew out on a few hands, the player would find another table. She joined tables where the players seemed to be doing well. This player was following short-term spikes in results, but did not have any overall method. She was a consistent loser, although she lost more slowly than Player #1.

Player #3

A third player believed in money management. He always started a game with $1000 and quit if he lost it. If he ran his stake to $5000, he would quit. When losing, he would get more conservative, regardless of the cards. When winning, he would press his bets. This player still loves to tell the stories of his occasional successes, especially one where he was almost tapped out and came back strong. We know that his frequent losses offset the winnings. Any good gambler knows that money management cannot turn a losing method into a winning one. At least this player had acceptable losses on each outing, and enjoys retelling his stories about big wins. Many of his listeners probably think he is a long-term winner.

Player #4

A fourth player carefully counted the deck, using the information to assess his chances on each hand. He varied his bets accordingly. While he endured losing streaks – the odds only provide a 5% edge or so in good situations – he kept playing as long as his criteria were met. We actually joined this player at the table and had a nice session, taking turns counting.

Conclusion

Blackjack players always seek a big score. They try to infer odds from sparse data, thinking that they see something special, something that others at the table do not see. The only winning player in our four cases had a method that drew upon the fundamentals of the game, acting aggressively only when the odds were in his favor.

He always knew the quantitative effect of the recent data, while considering all of the cards dealt.

A thoughtful reader might draw some useful investment parallels from these true stories.