Understanding probability means knowing how to put the odds in your favor. This can help you generate reliable investment returns over time.

Probability can also mean the difference between “investing” and “gambling.”

Two people can be playing the exact same game. Yet one of them is investing … and the other is gambling … based on the fact one knows how to use probability and the other does not.

We see this routinely in the real world. There are professional investors who earn reliable returns over time, and plenty of investors who are just “gambling” in the markets (because they don’t put the odds in their favor in a professional or consistent way).

It’s similar with the game of poker. There are professional poker players who earn a reliable income by putting the odds in their favor night after night … and a great many poker players who simply gamble.

But did you know this is even true of roulette?

A medical doctor named Richard Jarecki proved it in the most compelling way possible — by winning so much money at European roulette tables that all the casinos in Europe lived in fear of him.

Dr. Jarecki recently passed away at age 86. His achievements were featured in The Wall Street Journal. He made more than $1.2 million from roulette in the 1960s and early 1970s (which is more than $8 million in today’s terms, after you adjust for inflation).

By 1969, he was considered “a menace to every casino in Europe,” according to Robert Lardera, managing director of the San Remo casino (one of Dr. Jarecki’s favorites, located on the Italian Riviera).

“I don’t know how he does it exactly, but if he never returned to my casino, I would be a very happy man,” Lardera said.

The way Jarecki did it is a sort of mini-master class in probability. He took a game (roulette) where the odds are always in favor of the house, and figured out how to tilt them in his own favor instead.

As word of his exploits grew, Jarecki became semi-famous. He told reporters he was beating roulette with the help of “a powerful computer” at the University of London.

But this was actually a cover story to throw them off the scent — and to discourage others from trying to copy his methods. Jarecki used no wires or computing devices or sophisticated means of cheating. He simply paid very close attention and observed probabilities.

A roulette wheel is supposed to spin perfectly. But small manufacturing defects, coupled with the wear and tear of spinning hundreds of times per night, can cause a roulette wheel to show a small bias in the way it spins.

Jarecki would watch a roulette wheel, sometimes for thousands of spins. He noted any hidden bias that he saw — a slight deviation toward red or black. And then he devised a betting strategy to take advantage of that bias, which was often so subtle that nobody else noticed.

In Europe they use the French roulette wheel, which has 36 numbers plus the number zero. In the United States, we use the American roulette wheel, which has an additional double-zero.

If the ball lands on zero (or double-zero on the American wheel) the casino automatically wins. This is what gives the house a small-but-permanent edge over the typical roulette player.

The French wheel used in Europe was slightly easier to beat (due to the lack of a double-zero), and Europe’s casinos were also more accommodating to high rollers on a winning streak. And so, although he visited Vegas from time to time, Jarecki preferred Europe’s casinos over America’s.

It must have been tedious at times watching all those spins. Then again, hanging out in Monte Carlo and other such places, surrounded by glitz and glamour as he won huge sums, Jarecki might have felt like a real-life James Bond.

Either way, the key thing is he actually did it. Jarecki made the equivalent of millions (in today’s money) by putting the odds in his favor … through the careful use of probability … at a game that couldn’t otherwise be beat.

In the stock market, far too many investors are like the typical roulette player.

They don’t know how to put the odds in their favor, and they’re playing a game where the house edge is against them. (Fees and commissions on Wall Street are like the zero and double-zero in roulette. No matter what you do, the house takes a cut.)

But by learning to use probability — like Dr. Jarecki did — you can find ways to put the odds in your favor, even on Wall Street. If you can do this successfully, it’s like playing a different game than everyone else.

And unlike Europe’s casinos, the stock market can’t ban you for being a winner.

The window of opportunity in roulette is closed now. The wheels are manufactured with far more precision … and maintenanced or changed out more routinely … and the casinos are far more vigilant.

But a far bigger window of opportunity exists in the stock market.

And at TradeStops, a big part of our mission is opening that window of opportunity for the average investor … by sharing our proprietary insights into odds and probability and statistical analysis techniques … to help the small investor win.

Stay tuned,

Richard_Signature

Richard Smith, PhD
CEO & Founder, TradeSmith