# Do you have a system for winning at Blackjack…and at life?

If you’ve ever been to a casino you’ll know that the odds tend to be loaded against you.

In Roulette, for example, the house has a green zero number giving it a 3% edge (or in the US a ‘0’ and a ‘00’ giving it a 6% edge).

There is one game where you can theoretically steer the odds in your favour: Blackjack.

By counting the high cards (10 through colours) and low cards (2 through 6) dealt you may ascertain the odds of favourable cards being dealt to you and adjust your bet accordingly. Not easy, but possible.

Poker and Bridge players know the tactic intuitively.

The way to win the game is not to split your chips into 10 equal piles and bet the same amount on 10 hands.  Instead, you wait until you have a strong hand and increase your bet.

## The Kelly Model

A bright spark managed to put this idea in to a formula:   2p-1=x

P represents the probability of the outcome and x represent the percentage of you capital you should bet.

Don’t worry if algebra brings you out in a cold sweat (it does me too) as I’ve done the maths for you here:

 % likelihood of outcome % of capital to allocate 100 100 90 80 80 60 70 40 60 20 50 –

It’s logical enough: if you’re 100% certain of an outcome (e.g. the sun coming up tomorrow) bet 100% of your money.

If you are only 50% sure of an outcome then your odds are no better than winning a game of Two Up on Anzac Day, and you shouldn’t bet.

## Applying this to investment

You super fund manager doesn’t play to win, he plays not to lose.

That’s why he will hold up to 100 or 200 stocks on your behalf (and fail to beat the stock market index).

The richest investors don’t do this; instead they place big bets on high probability events.

In 1991, George Soros foresaw the ‘Black Wednesday’ meltdown coming and took a monumental \$10 billion short position against the British sterling, netting himself a \$2 billion profit.

Buffett thinks similarly.

Through 1988 and 1989 Buffett took a position of \$1 billion in Coca Cola shares (back when a billion dollars was a serious amount of cash) and by 1998 the holding had grown in value to \$13 billion.

He was well on his way to being the richest man alive.

Buffett wasn’t fazed with more than 40% of his entire net worth being tied up in the stock of one company.

He still works on similar principles today; it was not that long ago that he took a \$10.7 billion position in IBM – a big bet on what he sees as a high probability event.

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About

is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. Using a long term approach to building businesses, investing in equities, & owning a portfolio he achieved financial independence at the age of 33. Visit his blog

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