Learn to invest with marked cards

We recently saw the movie “21 Blackjack” based on a true story: six students from de Massachusetts Institute of Technology (MIT) in Cambridge, near Boston, are trained to become card counting experts. They end up earning millions of dollars in the Las Vegas casinos.

While we were searching for more information we realized we are not the only ones using this case for an article. Although the film won’t go down in history as one of the best (I don’t know if the book “Bringing Down the House” is much better), there are some lessons that are worth considering.

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Team leader (Professor Rosa or actor Kevin Spacey) inculcates a system of card counting and signs to his chosen students, which will help them “get luck on their side”. However, it’s not about being lucky, the truth is they increase their chances of success by creating rules to earn high amounts of money throughout a whole night in the casino. Professor Rosa also devotes much of his time to teach his players how to overcome pressure and avoid emotions. They will use the system repeatedly in order to accumulate huge profits.

Halfway through the film, the team’s “big player” (Ben), who usually had the highest gains, loses control and all of the weekend’s acquisitions.

Therefore, after what happened, Kevin lectures his favourite pupil:

“You got carried away by emotions!” “You weren’t counting, you were playing!”

When Ben stops counting (applying the system), he stops taking control of his emotions. Consequently, he begins to play like any other player exposed to chance. Chance plays in favour of “the house”, as casinos are a business. Yet, in another of the teacher’s criticism he says:” this is a business and not a game!”

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We find clear similarities between the movie and the world of investments. Successful investors don’t speculate allowing market circumstances to take part in their strategy and they apply methods that increase their chances of winning. There is not a unique method; multiple procedures could lead to success in the world of investments. However, all the approaches require systematic application and discipline in order to follow the previously established plan no matter what happens with the market.

Investors have to be patient and trust that the system they’ve chosen “matures” in one way or another.The more years the investor invests, the higher the chances of obtaining positive returns. The chart above (from the book “A Random Walk Down Wall Street” de Malkiel, Burton G.) shows how the average return on a stock investment is around 10%. However, the most interesting fact is that:

After 5 years, the range of negative returns is reduced to 2.5% and positive returns could reach a 19.7%.

After 10 or more years, the range of negative returns disappears. Therefore, returns can only be positive (e.g. in 15 years returns go from 4.2% to 19.1%).

-But, of course, in the short term we are exposed to a very wide range (-37% / + 53%)

Hence, investing in a long-term horizon is the only way an investor can “get luck on their side”. As shown in the film, where the MIT team needs a whole night to earn great amounts of money, it is from the long-term horizon that investors will put the odds (not luck) in their favour. After 5 years, probability will turn to favour investors and after 10 years it will be completely in their favour.

Now we can understand the reasons that justify the chart above. Despite wars, crisis and other disasters, the world’s GDP will continue to rise (this graph only represents the USA). All of these (more or less long) negative events are like anecdotes, including the last financial crisis in 2008-2009.

After 10 years, investors start to play with marked cards because they have in their favour the economy’s upward tendency and, by extension, the market’s tendency too: the odds will go with patient and long-term investors. Following this path is a guarantee for our system and investors will find support on this safe upward tendency, especially if they are insistent and invest in different periods.

But still, most people attempt to find a quick and easy way to make money. Just take a look at the money this movie raised, 157 million dollars, in other words, 5 times its cost of 35 million dollars: not that bad for a film with a moderate value.

Don’t let yourselves be caught (like in the movie) by these foolproof methods that promise to make quick and easy money, those only work sometimes or in movies. Instead, it’s better to have time on our side.

However, it is not only about time, the movie shows us that it is important to have a good system and mental discipline: if not, try to play blackjack and count cards at the same time, you will see that it is not that easy.

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