Larry Williams (1999, p.166-167) on casinos:
If you know you have an advantage in the game, you know that at some point you will be collecting the chips, that Christmas will come.
This is a vital concept for all speculators, it is a concept to build a belief system on, but the concept itself cannot be built on a belief. Casinos don’t operate on a belief. They operate, run their business, on pure math; they know that eventually the laws of the wheel or dice will prevail. Thus they keep the wheels spinning. They don’t mind waiting, they don’t stop. They also play 24 hours for a reason; the longer you play their negative expectation game, the more certain they are of getting your money.
I guess that is why I have always been amused by people who think they can go to Las Vegas to tap the casino’s bank. Casinos look at you and me as fodder for their bank accounts, and judging from the size of the megahotels as well as stock performance, they are on the right side of the ledger.
As traders, we must realize that time is our ally. Legal contracts say time is of the essence; that may be so when it comes to performance of obligations, but time is not of the essence when it comes to trading because, given an advantage in a game, the more time that elapses the more certain your eventual winnings.
Casinos don’t close for another reason; the players won’t quit. Players overtrade, in our vernacular.
We are not casinos but we can sure learn a great deal from them. We need to know for sure that our approach has a statistical advantage in the game. You need to test, to prove your strategy. You cannot just assume what you are doing will make money because you are so darn smart or good looking. Once you have proven through research that your approach works, it is then just a question of backing your convictions by following the system.
Dirk du Toit (2009) on casinos:
Casinos are businesses that know something about using odds to make money. Consider the following. If you are playing black jack in a casino, the mathematical odds in favour of the casino are actually quite slight, about 3%. But that doesn’t mean that for every $100.00 you gamble the casino on average takes $51.50 and you $48.50. No, you usually go home broke, or with considerably less than $48.50. Why is that, given the only slight mathematical odds in favour of the bank?
Because the casino leverages its 3% advantage very effectively. It serves you free drinks to impair your judgment, house rules require you to play first, you can’t freeze a bad hand to buy time to come up with a plan, and you can’t manage your losses. Casinos make money not only because they have the odds in their favour, but because they maximise the odds that are already in their favour. If you are playing blackjack as well as it is possible to play the game the odds are 3% against you. If you are distracted, angry, reckless, betting on long shots, the odds against you have increased. The longer they keep you at the table the more time they have to let the odds work for them and the greater the likelihood that they will take all your money. It’s the same in the market. The longer you are in the market the more time you give the odds that are in your favour a chance of doing their job. You must be the casino and let someone else be the punter. The casino wants volume. There is a direct relationship between the number of punters that come through its doors and the bottom line just as there is, for example, a direct relationship between over-gearing and losing money quickly. (p.189)
I want you to think like the casino, not the gambler at the casino. I want you to make all the ‘house’ rules that are within your power to make, rules such as when to trade, how much to trade, when not to trade, what goals to set. I want you to have understand that these are advantages that are available to you, for free. It’s a huge advantage to be able to manage losses, or to decide when to take profits. One of the reasons casinos make money is because they minimise the discretion you may use. The critical exercise of my free choice is one of my most important trading tools. It makes me the casino; I’m betting with, not against the odds. Deal the cards, don’t have them dealt to you. (p.192)
REFERENCE:
Du Toit, D. (2009). Bird Watching in Lion Country (2nd Edition).
Williams L. R. (1999). Long-term Secrets to Short-term Trading.
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