It won't be the first time Pabrai shows a lack of understanding of stochastic models... I feel that he's cultivating a guru aura with storytelling and investico-mythological stories. Yet as he's influencing people to invest with often sound principles, rehashing "wisdom" he reads, he's like a gen AI fed with value investing books, but still an important advocate of the value investing style. So mixed feelings. Excellent for new joiners, but to listen with a critical mind I'd add. Thanks for the article !
I don't think one has to be a poker pro to recognise that "just bet more when you're winning" in blackjack is a nonsense strategy. I think the better question is, how likely is his story to be true?
Say we believe that the house edge is 0.18%. The most generous assumption/approximation I can reasonably make is that he played 1000 hands, each at the maximum table limit (this second assumption is conservative - with more games at lower stakes, the probability of reaching +$150k drops.
My maths says the chance of reaching >$150k with a 0.18% house edge after 1000 games is ~0.7%. So yeah, Manuel is probably right - not lucky, just lying.
That's the more malicious explanation. I still wanted to give him some benefit of the doubt. Might even be on the level of email scammers making obvious mistakes to filter out the less gullible.
Nice find. Not understanding basic probability is a pretty massive red flag for a value investor running a fund his size.
I have been meaning to write a critical article of Charlie Munger as well (who is excessively worshipped by the value investor community IMO). His tenure at Daily Journal should raise a few eyebrows, using leverage on a heavily concentrated portfolio of mega caps that ended up underperforming the S&P 500 over more than 10 years. Without any skin in the game. While Buffett and Munger constantly advertise how much of an advantage it is to invest with smaller amounts of money, because you can invest in smaller companies.
Yeah, personally I have a hard time figuring out how much credit to give other things he says, because of anecdotes like this (and the constant name-dropping)
I am not clever enough to be a professional gambler but a transformational moment for me was when I realised that stock market investment really IS gambling. Since I realised that, and started to look at trades as stakes at a gambling table I have done much, much better.
Am I right to view the market maker spreads as the house take, same as on a casino table (blackjack or anything else)?
I'd say yes, it is similar to gambling in the sense that you make a "bet" with uncertain outcomes.
But the big difference is that markets tend to drift upwards over time, there is positive expected value in the long run (at least when just buying a broad index).
Casino games have negative expected value and you are expected to lose over the long run.
If you just buy & hold in the stock market, you will pay very little to the house.
might it be that he had an edge without understanding it?:
If he played BJ with one deck, in a situation where he has a winning streak it might be that he has statistically an edge die to better chances/ cards left in deck. No?
For that to be true, a winning streak would need to be a signal of a favorable deck.
In his example, the casino rules are single deck, shuffle after dealing half the deck. When you observe a streak of 6 wins, the deck has already been shuffled.
Pabrai even talks about it:
"They play single-deck blackjack, but they only deal half the deck — then they shuffle. The reason they deal only half is to make it difficult for card counters. The deck might become favorable, but then they shuffle, so you never get to play the good part."
It's genuinely astounding that he thought this have him a real edge. Makes you question some his other ideas ie. the book he wrote on odds.
It won't be the first time Pabrai shows a lack of understanding of stochastic models... I feel that he's cultivating a guru aura with storytelling and investico-mythological stories. Yet as he's influencing people to invest with often sound principles, rehashing "wisdom" he reads, he's like a gen AI fed with value investing books, but still an important advocate of the value investing style. So mixed feelings. Excellent for new joiners, but to listen with a critical mind I'd add. Thanks for the article !
Mixed feelings indeed! Glad you enjoyed the post
I don't think one has to be a poker pro to recognise that "just bet more when you're winning" in blackjack is a nonsense strategy. I think the better question is, how likely is his story to be true?
Say we believe that the house edge is 0.18%. The most generous assumption/approximation I can reasonably make is that he played 1000 hands, each at the maximum table limit (this second assumption is conservative - with more games at lower stakes, the probability of reaching +$150k drops.
My maths says the chance of reaching >$150k with a 0.18% house edge after 1000 games is ~0.7%. So yeah, Manuel is probably right - not lucky, just lying.
Yeah, it does seem obvious nonsense... but then I saw it shared on a substack with 6k+ readers, and I wondered if it's maybe not obvious to some.
Interesting, hadn't really done any thinking on the probability of a the lucky run actually happening.
Great writeup. Pabrai did not even get lucky. He just created a false hero story that no one with basic knowledge of probabilities could believe.
That's the more malicious explanation. I still wanted to give him some benefit of the doubt. Might even be on the level of email scammers making obvious mistakes to filter out the less gullible.
He is a story teller - that story made him huge money as people believe it and invest in his fund. The returns of his fund speak for themselves.
Nice find. Not understanding basic probability is a pretty massive red flag for a value investor running a fund his size.
I have been meaning to write a critical article of Charlie Munger as well (who is excessively worshipped by the value investor community IMO). His tenure at Daily Journal should raise a few eyebrows, using leverage on a heavily concentrated portfolio of mega caps that ended up underperforming the S&P 500 over more than 10 years. Without any skin in the game. While Buffett and Munger constantly advertise how much of an advantage it is to invest with smaller amounts of money, because you can invest in smaller companies.
Do it! (easier to hate on Pabrai than Munger though ;) )
oh well, another guru
FURU
Great story teller indeed. I personally think that "Dhando Investing" is one of the worst and most dangerous investment books of all time.
Then I'm glad I never read it
I remember hearing him tell this story some years ago in TIP and being so confused how he (or the host) could believe it.
pabrai has regular instances of being a blowhard, and a munger hanger-on.
which is sad, because he loses the veneer of truth whenever he has interesting stories on illiquid investments and his charities.
Yeah, personally I have a hard time figuring out how much credit to give other things he says, because of anecdotes like this (and the constant name-dropping)
I am not clever enough to be a professional gambler but a transformational moment for me was when I realised that stock market investment really IS gambling. Since I realised that, and started to look at trades as stakes at a gambling table I have done much, much better.
Am I right to view the market maker spreads as the house take, same as on a casino table (blackjack or anything else)?
I'd say yes, it is similar to gambling in the sense that you make a "bet" with uncertain outcomes.
But the big difference is that markets tend to drift upwards over time, there is positive expected value in the long run (at least when just buying a broad index).
Casino games have negative expected value and you are expected to lose over the long run.
If you just buy & hold in the stock market, you will pay very little to the house.
Basically agree to the writeup and comments, BUT
might it be that he had an edge without understanding it?:
If he played BJ with one deck, in a situation where he has a winning streak it might be that he has statistically an edge die to better chances/ cards left in deck. No?
Best, another sceptic
No.
For that to be true, a winning streak would need to be a signal of a favorable deck.
In his example, the casino rules are single deck, shuffle after dealing half the deck. When you observe a streak of 6 wins, the deck has already been shuffled.
Pabrai even talks about it:
"They play single-deck blackjack, but they only deal half the deck — then they shuffle. The reason they deal only half is to make it difficult for card counters. The deck might become favorable, but then they shuffle, so you never get to play the good part."