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Eric Houssels
Eric Houssels
Articles 

Everything I Ever Needed to Know about Investments I Learned at the Racetrack -- Part II

October 19, 2007

Lesson #3: On Touts

A common and very wise response to the guy in the get-rich-quick infomercial is: if he knows all this, why is he willing to tell me and not just do it himself? To this, I proclaim a resounding hallelujah, amen! Touts at the racetrack - make their living from their business model - their business of selling stuff - not from their returns on gambling capital (it is my suspicion, in fact, that most touts are degenerate gamblers who recycle their tout sales right back into the pari-mutuel system; to their credit, we could call this a soft form of eating their own cooking).

If you buy the picks of a tout, and there is nothing wrong with this, just know what you are not getting and what you are getting for your money. You are not getting a way to make money. Remember, they would be quite quiet if they actually had this. You are not getting - and this is, perhaps, most important for investing - a way to abdicate responsibility. If you pay for someone's opinion, act on it. If it does not work out, you - and no one else - is responsible for your actions and your losses. No one is entitled to a "free roll": the glory of the winnings with no responsibility for the losses.

On the positive side, what you are getting with the tout's picks is a wonderful time saver that will free you up to converse with the other members of your party and enjoy the many non-economic delights of a nice day at the track - good for you for being social!

Do the touts at the racetrack remind you of anybodies in the investment world? The highest IQ and highest paid (ex-salesmen) Wall Street variety of tout is called the chief strategist of pick-your-favorite brokerage house. The off-Wall Street crowd is touted by a different animal - the newsletter writer. The lessons of the racetrack tout apply to both of these investment touts.

The investment touts' business is their touting - not their gambling. Do not expect to make money following their recommendations (in fairness, both kinds of touts are reasonable sources of ideas). Do not psychologically abdicate responsibility for your own investing to them. If an investment does not work, you may choose to not listen to them the next time, but it is not "their fault." You are solely responsible for the results of your buys and sells.

Finally, and to end on a positive, if you do decide to go with these investing touts, you will have freed up some time. In this event, use it well. Be social, visit friends; heck, maybe even head out to the track!

Lesson #4: Put Your Money Where Your Mouth Is

I feel very fortunate to have had this lesson introduced to me at the racetrack and have had it completely ingrained by my growing up in the quintessential "put up or shut up" town of Las Vegas. If I, in fact, had to offer the single most valuable lesson of the Vegas gambling culture that courses my veins, it would be this one.

The hope-and-fear jawjacking analyzers at the races and in the investment arena are doing absolutely nothing by their talking. In this age of global warming, I would propose to classify their jawjacking as a pollutant to be counted against their carbon footprint. Talking means nothing on its own; as a prelude to action, it may have some value but its value remains absolutely dwarfed by the action itself, for it is only through action that real life-change can occur.

Let us, furthermore, consider the following foursquare to better understand the psychology, as well as the reality, behind the talker:

Outcome Proves Right

Outcome Proves Wrong

Actor

Positive life-change has occurred!

Real harm has occurred and hopefully learned from

Talker

Bragging rights alone: no real upside has been harvested

No real harm has occurred and person usually ducks or tries to duck the responsibility

What drives the talker's psychology is not really ever having to risk anything as, when he is wrong, no real harm comes to him and it seems he can often conveniently forget, never again mention his error (survivorship bias, if you will). When he is right, on the other hand, he will scream and shout and feel as if he has captured the upside of his analysis. The only upside he has captured is the upside of "feeling smart" because, again, as nothing real was ever risked (and this not-risking-anything is all that is real for the talker), nothing real is ever rewarded.

The actor, on the other hand, is straight. He risks, and is rewarded or is harmed, both in the real sense. The actor shuts up and bets, for this is the only way to truly test his knowledge.

There is a corollary to the "put your money where your mouth is" lesson; I call it "no whining." Whining is all too common for my beloved actors/bettors at the racetrack and is most unbecoming. Everyone has a story about a "bad beat;" they collect race-by-race. Bad beats, however, come with territory. They are part of the game. Most importantly, the bad beat story will not be paid at the betting window - they accept winning tickets only.

Whenever I feel the urge to whine after a finish does not go my way, I try (and sometimes fail, in all honesty) to remind myself of the old story that my father taught me during a particularly bad whining episode years ago. A gambler had been whining all day immediately following each race about how, after reviewing his racing form, he coulda had that longshot or that exacta or, worse still, he woulda had this one or that one had some external force not unjustly handicapped him. His tablemate, well-schooled in the "no whining" corollary, finally has enough. After the subsequent race, the couldas and wouldas begin again and, all of a sudden, the tablemate chimes in with the question: "Did you have that one?" The whiner, a bit perplexed by the question as he assumes his whining to speak for himself, answers "No." The tablemate then elegantly responds, "You shoulda!"

The antidote to "no whining" is elaborated in detail in an excellent book by Carol S. Dweck titled Mindset: The New Psychology of Success. After each race/each investment - be they good or bad - we should learn something. In the well-defined games of horseplaying and investing, you study, then act, you win or you lose, you learn and then move on. There really is not much more to it than that.

About the author:

Eric Houssels
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.2/5 (6 votes)

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