The gambler who cracked the code

It was the evening of November 6, 2001.

All of Hong Kong was talking about the biggest jackpot the city had ever seen: at least HK$100 million (then about $13 million) for the winner of a single bet called the Triple Trio.

The wager is a little like a trifecta of trifectas.

It requires players to predict the top three horses, in any order, in three different heats.

Statistically speaking, there were more than 10 million combinations possible.

If no one wins, the prize money is rolled over to the next set of races.

On that warm November night, the pot of gold had gone unclaimed for six times over.

A million gamblers placed their bets and hoped for the best.

The trifecta

Horse racing is serious business in Hong Kong.

At the Happy Valley Racecourse, stands are ringed at night by one of the sport’s most extravagant views - Neon skyscrapers and neat stacks of high-rise buildings.

Lush hills form the perfect backdrop in the darkness.

At the ground level, the locals clutched racing newspapers and leaned over the handrails.

At the crack of the starter’s pistol, the announcer bellowed through the loudspeakers, “Last leg of the Triple Trio! And away they go!”

Across the road in a cozy office, Bill Benter and his associate had their eyes fixed on three monitors, which displayed a matrix of wagers their algorithm had made on the race.

They added to a total of 51,381 bets.

They watched as the algorithm filtered out the losing bets, leaving only 36 lines on the screens. 35 of their bets qualified for a consolation prize, and one correctly predicted all nine horses.

Bill just made $16 million dollars.

He did not claim the winnings, but locked the winning tickets in a safe.

No big deal, he figured. He’ll make it back, and more, over the rest of the racing season.

Beating the unbeatable odds

Horse racing is a sport that contains many variables and plenty of outcomes.

Breaking of legs. Jockeys falling off horsebacks. Other unexpected mistakes.

It is common knowledge that if you play for long enough, failure is inevitable.

Until this man, Bill Benter, showed us otherwise.

At the beginning, Bill struggled to make his algorithms stay ahead of a statistical phenomenon known as “gambler’s ruin”, which stipulates that a gambler playing a game with negative expected value will eventually lose everything.

His breakthrough came when he put together a private system of odds that was slightly more accurate than the public odds.

For example, public odds may show that a given horse has a payout of 4 to 1. Bill’s model might show that the horse has higher odds than that, giving him a small edge over the public.

Together with 20 other inputs, such as wind speed, temperature and recent performance, Bill built his own set of odds from scratch, which proved to be profitable.

He coupled this with thousands of small bets made thousands of times.

It worked like a charm.

Bill created a systematic horse-racing algorithm that proved to be profitable over the long term.

Over time, Bill’s algorithm was refined to include more parameters per horse and it contributed to his immense success betting at the track.

On November 6, 2001, Bill Benter won the trifecta.

He left the tickets, and the $118 million worth of winnings unclaimed.

Based on club policy, the money was then given to a charitable trust.

Lessons from Bill Benter

“I find the real business world to be a lot more difficult than horse racing”

Over the course of his career, Bill made close to a billion dollars.

His story is truly unorthodox and inspiring.

Here are 3 lessons we could learn from him:

Lesson 1. Small edge, high volume and patience

A small edge, repeated thousands of times can yield a high profit.

Bill used to say, “The impact of bad luck can be diminished by betting thousands and thousands of times.”

His ability to back thousands of bets every day ensured his regular profit.

His patience came in the form of the time it took him to build his profitable model in the first place, and he clearly knew that betting for profit was about the long haul and not about short-term returns.

Lesson 2. Long-term sustainable profits > short term wins

No one can guarantee a profit over a small sequence of bets.

Bill knew this, which is why he made thousands of bets each day.

Long-term profits are what truly matter and the ability to understand losses and placing them in context is as important.

It is critical to understand the return profile of your strategy in order to maximize your edge.

Drawing a parallel to systematic investing, it’s important to know what type of strategy you are utilizing, and be aware of the nuances of the equity curve profiles over the long run.

As a recap, take a look at my previous article on the fundamentals of systematic investing.

Lesson 3. Use technology to your advantage

Bill knew that it was impossible for him to generate odds as quickly as his computers could.

Very early on, he recognized the importance of leveraging computing power to create his private book of odds.

By relying heavily on his algorithms, Bill was able to eliminate his emotions and perform his betting operations systematically.

At Tail Watching, this is something we completely agree with - If a process can be automated and made systematic, it should be.

Beyond the racing: The enduring legacy of Bill Benter

“Gambling has always been the domain of wise guys from the wrong side of the track.”

Perhaps more than anyone else, Bill has changed that perception.

By the time Bill moved back to Pittsburgh, he has inspired others in Hong Kong to form systematic gambling syndicates of their own.

The Jockey Club also began publishing technical data sets to level the playing field.

Because of Bill’s success, an entire generation of high-tech gamblers has been created, tracing their roots to Bill’s original computer-based wagering systems.

His legacy lives on.

That’s it for today!

Got questions? Feel free to drop me a note. I respond to every email.

I’ll see you soon!