A contrarian strategy for gambling?

Benj Gallander and Ben Stadelmann
Friday, July 28, 2006

If you’re not familiar with Wayne Allyn Root, you might get the wrong impression upon learning that his book is dedicated to Benjamin Graham, described as “Wall Street’s original value investor and the first true contrarian.”

You might assume that he’s just another stodgy money manager who made a fortune running a value fund and wants to see his legacy in print. But this author is actually a straight-shooting professional sports handicapper, and his book is titled The Zen of Gambling.

Root describes Wall Street as the “ultimate contrarian adventure”; of interest, however, is his pronouncement, “Step by step, almost word for word and theory for theory, I have found that ‘investing’ on Wall Street imitates betting on sports.”

If we designed a course on modern economic evolution, it would have to feature the ascent of professional sports into one of the largest businesses in the history of capitalism. Sports betting has followed closely behind, growing to encompass huge moneymaking enterprises that include on-line betting sites.

Mike Orkin, a Ph.D. in statistics and a gambling expert, said in his book Can you Win? that if you’re going to gamble, bet on sports because, unlike casino games, it’s impossible to prove that you can’t win in the long run. The same could be said for poker, that crazy TV phenomenon that showcases people who probably shouldn’t be on the screen (except Toronto’s own Daniel Negreanu).

Even Jim Cramer, in his recent book, recommended only one title for his stock investing audience: Picking Winners, a book on handicapping horse racing.

Gambling is sometimes dismissed as mere entertainment, but many are unaware that probability theory was developed in the mid-1600s from the correspondence between two great mathematicians, Fermat and Pascal, who were analyzing betting games. Now you know why the math club was always playing cards in the cafeteria.

Primarily a book on using a contrarian approach to sports gaming, The Zen of Gambling devotes a chapter to stock investing and its relation to sports betting. It draws a parallel between the way the public gravitates toward buying popular stocks and the way they tend to bet on popular teams such as the Leafs, Yankees, Cowboys and Lakers (Root takes the underdogs instead).

It outlines how bettors also love to place wagers that have low percentage outcomes but the potential for big payoffs. The same goes for investors who use exotic strategies on options, futures and day trading, looking to make a fast buck.

But of particular note to us is Root’s astute observation that time is the one big advantage stock investing has over sports betting. If you can afford to wait out a position that has gone down, he says, you can make more money in the market than wagering on teams.

By its nature, a contrarian stock has a good chance of regaining the loss over time. But the outcome of a wager is instantaneous; this is what makes betting attractive to bettors: the prospect of a reward without a long wait.

Which highlights two important requirements to be a contrarian stock investor: patience, which entails having control over one’s emotions, and a sufficient bankroll to ride out the inevitable losses and stay in the game.

If investing can be an intelligent and serious business, so can gambling. Just stay away from the low percentage gambles like lotteries, slots, keno, and marriage