Card Counting, Investing, and Taking Advantage of Asymmetry

In 2007, while I was in the Navy, I learned to count cards. This "skill" (easier than most people think) was picked up through practice during 6 months out to sea. I wanted to count cards without being "obvious" as I didn't want to get kicked out of a casino. I'm also not a very good liar.

My friend was bullish on a system called The Martingale. This is a statistically flawed system that attracts those who think they understand probability but do not. Basically, you place the first bet..let's say $5. Win or lose, you are either +$5 or -$5 at this point. Round 2: If you won round 1, you place another $5 bet. If you lost, you double down and place a $10 bet. You repeat the process. The idea is that as long as you keep doubling down until you eventually win, you'll always make up for all of your loses and also get your initial bet back as profit. It falls apart as it's impossible that you'll have enough money to keep doubling until you eventually win everything back. Let's say you go for 3 rounds. Here are the possibilities:

• Lose, lose, lose (-$5,-$10,-$20 = -$35)
• Lose, lose, win (-$5, -$10, +$20 = +$5)
• Lose, win, lose (-$5, +$10, -$5 = $0)
• Lose, win, win (-$5, +$10, +$5 = +$10)
• Win, lose, lose (+$5, -$5, -$10 = -$10)
• Win, lose, win (+$5, -$5, +$10 = +$10)
• Win, win, lose (+$5, +$5, -$5 = +$5)
• Win, win, win (+$5, +$5, +$5 = +$15)

Notice how the biggest loser of any given period is always going to be larger than the biggest winner by the nature of the power of 2. Here, even though only 2 of the 8 outcomes result in a loss, the -$35 loss is more than twice as large as the biggest possible win in a 3 period attempt. Even without the house having an edge this is not a winning system. Also, there is the problem of what to do at the black jack table as all tables have a minimum and maximum allowable bet..usually a ratio of 1 to 100 which would only allow for 7 consecutive loses before you'd be out of room to double for your 8th bet.

Despite my friend flocking to this system like a moth to the flame, I identified it as a losing system. However, I also knew that blackjack dealers would see this as a suckers play, so I mixed it with card counting. I was stationed on the USS Ronald Reagan and found a small casino (The Golden Acorn) which had an excellent table for me to practice on. This was a $2-$500 table so it lended itself to the martingale as it allowed for an 8th bet given 7 losses in a row. When the "count" was bad (the odds were not in my favor based on the remaining ratio of high cards that hadn't yet been dealt and also the ratio of aces remaining), I would use a low version of the Martingale. Basically, bet $2. If I lose, bet $4.. and so on..with a maximum of $32 which would repeat until I eventually won. Small loses occurred on that, but it was enough to hide that I was counting. When the count was good, I would start the sequence around $20 and continue to bet $20 after each winning hand and double after each loss up to the table maximum. The first visit, I walked away with $700 after an hour or so of play. The second visit I walked away with $2000 after a couple of hours. The third visit carried with it the company of a girl from the ship (not an attraction, but still a distraction for my count). Needless to say I broke my rule on a $500 bet since I had lost my place. I haven't been back to the blackjack table since.

While leaving could be seen as an overreaction, I am not a gambler. Instead, I love finding various ways to profit from my own intelligence... or more so, my willingness to think outside the box when others are unaware they are stuck in one.

My next interest was the stock market. During another 6 months on the Pacific Ocean, I learned about investing and also conducted minute by minute analysis of 10 years of Walmart stock data. Walmart was unique to me as it was the only stock I could find which had stayed in such a tight range for such a long time (basically between $45 and $65). I found various reversal points that could be fun to day trade upon. I don't have my notes from back then..but it was something to the effect of watching the first 15 minutes of the trading day (for instance), and based on what Walmart did, I would place a bet on what it would do during the second 15 minute segment. I broke the whole day out into the highest opportunity times. I traded like this for a little while..making 10% or so over a couple of weeks. Then, I made a ridiculous error. I left 3 to 1 margin ($100,000 invested where only $25,000 was mine) in over night. I had bought $100,000 at around $55 per share. The next morning I woke to find it had gapped down to $50 per share. Walmart was down 10% but I was down 40$ (a loss of $10,000 leaving me with only $15,000). I had disappointed myself and so I quit investing for a time.

I learned a lot more about how investors tend to undervalue certain stocks. This in large part is due to the common misunderstanding of asymmetry in the market. I found a stock APL which had been over $30. I watched it around $5 after the market semi-crash about 8 years ago. It had lingered around $5 with low volume..forgotten by the market. After looking over the balance sheet and not seeing anything too worrisome, I looked at the tightening bollinger band (a sign that a very still priced stock could breakout soon for a big move up or down). I decided that the market had not priced in the upside.. the asymmetry of gain vs loss of this stock. After looking over around 100 stocks, APL remained my pick. My criteria were:

• Stock must be below recent pricing
• Stock must have low volume (a sign it has been forgotten)
• Stock must have a tight bollinger band (a sign a breakout could be soon)
• The risk vs reward in my imagination must provide a positive outcome..considering the average of all possible reasonable outcomes.

I put $15,000 toward $5 call options which were priced at a mere $0.40 each. The stock was around $4.90 when I made the purchase. Whether the market saw my bet and that triggered a breakout or it was going to happen anyway..I'll never know. Those options were going to expire in about 2 weeks and the stock exploded. It went to $9.40 and my $30k went to $239k at the peak (the options I bought for $0.40 were now worth around $4.80). I should have kept those as $5 call options to have better odds of remaining in-the-money. Instead I got greedy. If I wanted to be greedy more safely I could have kept half of my $5 calls and used the other half to buy $10 calls. Instead I traded all of my $5 calls for $7.50 calls set to expire in a week or so. The market then did what it does best which is to squeeze options players out by closing exactly on a strike price at options expiration. It closed just under $7.50. If it had gone to around $11 I would have had about $2 million just a few weeks after placing a $15,000 bet. I left the market for a few years again.

I now live in Alabama. I work as an Electrician. I am determined not to work past the age of 50 (not that there is anything wrong with that). I'm focused on learning from my past mistakes. So far this year I am up considerably in my investments. I had $6000 in on OPTT stock at around a $1.50 price. I sold when it went to $5.15 and made $16k. I then moved my money into SCTY (solar city) at $21.60. I sold out of a little at $25 a few weeks later and sold the rest in my trading account between the prices of $27.03 and $27.33.

My little brother recently got me into crypto investments. I plan on making some very profitable investments this year. One should never gamble what they are not willing to lose. To the sceptic, I recommend moving 0.5% of your savings into the crypto sector. At most you will lose half of a percent. I view this sector as another fantastic example of unperceived asymmetry. The potential future gains are vastly higher than any potential loses. That is my view at least. I'll continue on this path and hopefully will provide a part 2 to this post if I am successful in my strategies.

For the record, my current largest crypto investments (all based on risk vs reward asymmetry) are:

• Vericoin (the market cap is around $1.5 mil and the wallet is pleasant. The developers are open and active. This is my largest investment purely because of what I see as poor pricing by the market. The release of CPU mineable Verium soon should bring a lot more investors and users into this. I love the protocol and how it answers certain logical issues the block chain has had for awhile..such as improving PoS. I'm hoping for a 5 fold increase by the end of year..though I acknowledge anything could happen)
• Steem (I have powered up all of my Steem and will consider doing a little bit more shortly. How could you not invest in Steem? Growing user base alone should continue to drive up market cap for awhile)
• Factom (Already receiving some funding from the US Government and being tested by companies. I like my odds here)
• Synereo (I love the risk reward I see at these prices. They need product release which should be pretty soon. As long as they are able to grab a decent user base in the first few months after launch they could go a lot higher).

I recommend reading Naseem Taleb's book Fooled by Randomness which discusses asymmetry in the market which people can be blind to and also The Black Swan which discusses rare events and how risk assessments don't properly account for large negative events, especially as the markets are concerned.

Happy Steemit-ing!