Steven Crist: Publisher and Columnist, Daily Racing Form

I am here to talk about why most of what you have heard about horse racing is wrong, and why horse racing is much more similar to what you do than other forms of gambling. The general public probably thinks that for the most part, horse racing is just like the state lottery or playing craps or roulette in a casino, except that you have horses running around in circles rather than ping pong balls or a spinning wheel.

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In fact, horse racing is entirely different from those forms of gambling for one simple reason. In horse racing, you are not betting against the house. In other casino games, you cannot win, with the exception of blackjack and poker. A good litmus test for someone being a liar and an idiot is if someone ever tells you, "I am really good at roulette," or "I win at craps," or "I have a system for beating the slot machines." There is no such thing. These are games with fixed percentages. The casino might as well attach a leach to your forehead when you walk in the door because the longer you stay, the more you will lose, except for short-term, meaningless fluctuations.

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The exceptions to that rule are blackjack and poker. If you count cards diligently in blackjack, you can get a 1.5 percent edge over the house. Casinos, of course, don't get built by players having edges, so the casinos will eject you if they figure out that you're counting cards. This happened to me - I was playing a friendly game of blackjack at the Barbary Coast in Las Vegas about ten years ago, and suddenly a floorman came up to me with an Instamatic camera. I thought, "Wow! This guy recognizes me from horse racing telecasts!" I thought he would take my picture and put it up on the gambling wall of fame or something. Instead, he took my picture and said, "Sir, you are no longer welcome to gamble in this casino." Even though I was only playing five and ten-dollar blackjack, I was still counting cards. That is a very small edge that they don't let you have.

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The only other game in a casino that you can win at is poker, which is always situated right next to the horse racing area. The reason that you can win at poker and horse racing is the same - you are not betting against the house; you are betting against the other players. This is such a crucial and fundamental difference, and it is lost on the general public. The house is not setting the odds. In roulette, there are 38 spaces on the wheel, and if you pick the correct one, the house will pay you off at 35-to-one, and they will keep the difference. The longer you play, the more you lose and the more the house wins.

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When the other players are setting the prices, it is an entirely different story because somewhere between frequently, occasionally and rarely, the public makes the wrong price. That is the beginning of the successful equation in horse racing. It took me about ten years as a racing reporter and columnist, trying to track down the elusive method of picking the winner of every race, to realize that that was a fool's errand. In ten minutes I can teach anyone in this room how to pick the most likely winner of a horse race. There are data about past performance that we publish in the Daily Racing Form that correlate very strongly with the most likely winner in the race. Most horse players spend their lives thinking that if they just studied a little bit harder or got a little bit smarter, they could pick the winner of the race enough to make some money. There is no such thing. Picking the most likely winner is no great feat.

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What you really want to do is determine which most-likely winners are good prices and which most-likely winners are bad prices. It is a very simple equation:

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Price X Probability = Value

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The entire world of investing is that simple too. Here is what I mean. If a horse has a 33 percent change of winning a race, and if you can get odds of 2-to-1 on him (which means tripling your money), there is no value - the horse is priced correctly. If a horse is 6-to-5 (which means you will only get back 120 percent of your bet) and he is only 33 percent to win, then he is a terrible bet. If you're going to get 4-to-1 (quintupling your money) on a 33 percent chance winner, then it's a great bet.

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The majority of people who play horses refuse to think that way. They sometimes say that no horse is worth taking a short price on. That's just not true. If a horse is 90 percent to win a race and you're going to get a 50 percent ROI, then he is one of the greatest bets in history. They sometimes say that all long shots are over-bet and that you should never bet on a long shot. That's not true either. If a horse has a 10 percent chance of winning a race and he's 20-to-1, then you're getting double the value than you should.

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What you wait for as a horse player (and investors tell me that they wait for the same thing) is mispricing, for the public to make mistakes. I cannot say for sure why the public makes mistakes in your world, but I know why they make them in mine. The people who most influence the odds in racing are known as "public handicappers". These are the guys at the local paper who run a set of picks every day. "Clocker Joe" or "Cowboy Jim" give you their 1-2-3 picks in every race. Their 1-2-3 picks have an entirely different motivation than your presumptive motivation to make money. Clocker Joe and Cowboy Jim want to pick the greatest possible number of winners so that they can remind their boss at contract time that they picked 31 percent winners in the previous year. That's pretty good for a public handicapper. Yet, with a typical payoff structure, Clocker Joe will still have lost his customers money. We have already taken this analysis to a level of investment and mathematical sophistication far beyond the ken of any metropolitan sports editor. The sports editors continue to reward the Clocker Joes of the world who pick 31 percent winners at very low prices because they don't understand the equation of Price X Probability = Value.