How Pee Wee, the cat, beat the “pro” gamblers

In my last article, Boring Investment Tips that Work, I provided ideas that will help you make money investing. This time I turn to gambling and a valuable lesson which also relates to investing.

Let me start with a story related by Bill Brownstein in his column in the Montreal Gazette. It seems that Andrew Weinman, a reformed gambler, wanted to show his buddies that even sports gambling is pure luck, unrelated to any supposed knowledge of the sport. Weinman and his two-dozen football-savvy buddies had an NFL fantasy-football league where they each tried to predict the winners of each week’s games. Weinman entered his cat, Pee Wee, in the pool and at the end of the season Pee Wee was the big winner. The cat beat all the supposedly knowledgeable football buffs in choosing winners and beating the spread. Obviously, the cat knew nothing about football so Weinman made the picks by choosing teams with cat names such as Detroit Lions, Cincinnati Bengals, Carolina Jaguars, etc. If there were no teams with cat names he picked ones with bird names like Philadelphia Eagles, Baltimore Ravens, Atlanta Falcons and so on. If two teams playing against each other had neither cat nor bird names, he put down two treats representing the teams and whichever treat Pee Wee went to was chosen.  

So, what is the lesson? Should bettors in a sports pool make bets using Pee Wee’s strategy or a similar one? Of course not. It was pure chance and Pee Wee had as much chance as those who thought they knew something about the game. In all gambling, the only sure long-term winners are the house or bookies. Bettors always lose in the long run. Most people know that is true of casinos but the big thing now is sports betting where many think they are smarter than the average person. The moral of Pee Wee’s success is that no matter how knowledgeable you are, your chances are no better than chance alone. Why is that? It is because the odds or spread are set by the combined bets of all the bettors. Everyone thinks they are smarter or more knowledgeable than the average person but that is a mathematical impossibility. On any match involving a spread and a bookie, less than half the bettors will win.

Investing vs gambling

Unlike gambling, in the long run investors who follow basic principles like those in my article, Boring Investment Tips that Work, will make money. However, there is a parallel between Pee Wee’s story and investing. Just as supposedly savvy sports bettors do not beat the odds, professional money managers almost always fail to beat the indices over the long term. The reasons are not exactly the same but all human decisions are rooted in psychological principles. It is hard to go against our instincts when gambling or investing. Unfortunately, those instincts will hurt you. To name just a few: Greed; FOMO (Fear of Missing Out); “The trend is your friend;” in gambling – if Red came up 16 times in a row, Black must be more likely to come up on the next spin, In the market – if a stock is down 50% it is a good buy. I could go on and on.

For those interested in more on index funds and investing. I highly recommend, The Power of Index Funds by Ted Cadsby, written in 1999 but still available in several formats on Amazon. It is very easy to read. However, I must note two areas where I disagree with the advice in the book. Cadsby does not discuss ETFs, exchange traded funds. Perhaps that is understandable given that he was an Executive VP of CIBC when he wrote the book and as he notes CIBC had the largest number of index funds at the time. Also, ETFs were not nearly as common in 1999 as they are today and discount brokers were not around back then. The other point with which I disagree is his advice to, perhaps, put a small part of one’s portfolio into actively managed funds in areas where markets are not as efficient as the US or Canadian markets, such as Asian or emerging markets. That advice was from 1999 and today, I doubt that there are any inefficient markets. Please note that today Cadsby is a consultant, speaker and best selling author and his views may or may not be the same as mine on these two points.

If you enjoy reading my articles (whether you agree or not with everything) please share/forward them and encourage others to subscribe.