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Seneca: Making the most of an investment edge, March 2019

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21 Mar 2019

Seneca: Making the most of an investment edge, March 2019

Whether in skill games like Poker or luck games like Blackjack, repeatable success requires tilting the odds in your favour, then betting the appropriate amount as a percentage of your bankroll. In Blackjack, the way to tilt the odds towards you, and thus away from the house, is by counting cards (this however is considered cheating by casinos, so I wouldn’t recommend it). In Poker, you and your fellow players are on an equal footing, so to tilt the odds in your favour you just need to be better than them. You do this by having a better strategy or being better at bluffing or calculating probabilities (or a combination of all three). As for the percentage of your bankroll to bet, this relates directly to the extent to which you have tilted the odds in your favour.

What this all adds up to is understanding your edge and profiting from it. Investment success works very much in the same way.

The efficient market hypothesis says that stocks follow a random walk. Once transaction fees are taken into account, the odds are tilted away from you and it thus becomes practically impossible to beat the market. However, if this were true the likes of Warren Buffett and Renaissance Technologies’ Jim Simons should not exist. Except they do and, statistically speaking, the likelihood of their high investment returns being attributable to luck is so small that it is practically zero. What they both did, and in very different ways, was to tilt the odds in their favour. In other words, they had an edge and put it to good use. 

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