E303: What Blackjack Taught Me About Investing w/Ari Levy
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What early experiences shaped Ari Levy's interest in probability and investing?
You said that probability theory was your first love.
What made you love probabilities from an early age? Sports statistics, I would say, number one. To simulate baseball seasons when I was really little on the Apple IIe computer on a very... early video game that didn't you know was uh pretty much mostly statistics and not not actually like interacting in the game as like a batter or pitcher but just hitting SB if you're trying to steal a base but I would simulate baseball seasons between you know You could have the 1927 Yankees play the 1955 Giants and have Willie Mays play against Babe Ruth. And so I was like, just love that concept and trying to think about advanced statistics at a young age and just games of strategy, played a lot of cards, try to figure out how to win things, good risk adjusted, asymmetric calculated bets effectively.
And you ran a blackjack team when you were at Stanford. What did you learn about that? And how does that relate to how you do public investing today?
I took a course my freshman year at Stanford. This would have been 1997, called Math and Sports. That was my favorite class I ever took. Professor Tom Cover at Stanford taught this freshman seminar. Small group of 15 like-minded folks just thinking about this same kind of thing.
How did Ari's blackjack team experience influence his investment strategies?
you know, game theory, probability theory in both sports, which was the name of the class, but also the deck of cards. And Professor Cover had his own blackjack team in the 70s and just great stories. Fascinating statistics professor. And a couple of us from the class, Fred Brad Griffith, who founded game time, uh, which is, um, uh, ticketing, the online ticketing platform. And I just took a real liking to it. Uh, we were, we were already friends living in the same freshman dorm and constantly we're quizzing each other on the blackjack statistics. And so we just got excited about how we could optimize that, that game. And in, um, in, in cards, it's a, there's a known quantity known set of, you know, there's four suits and, uh,
13 cards in each suit and all the rules that we all know. And so it's much more of a fixed probability in the stock market. They call it, you know, stock is more of a random walk. So it's a whole different distribution. There's no history doesn't repeat itself exactly. But like the Mark Twain quote, history doesn't repeat itself, but it rhymes.
What is the significance of the Kelly criterion in risk management?
There's, you know, a lot of historical analysis to help figure out what the future might hold to make educated decisions. risk-adjusted. There's some principles from the things I learned in card counting, specifically something called the Kelly criterion, which is like a theoretical proof for a known set of odds. Again, with cards having a known set of odds, it tells you how much to risk on any given wager such that you're maximizing your profit while also not putting your balance sheet at a big, it's called risk of ruin.
Most famously, long-term capital management had what they believe this risk-free arbitrage, and they hadn't thought about all the second order effects of it. And ultimately, the fund blew up because of Russia and the divergence in pricing. How do you go about looking at your risk and assessing where your trade might go wrong?
That is a really good point and something that we all think about if you're a smart investor. You can't believe that it's going to, like what I said, with certainty, there's still, you know, events, idiosyncratic things that could happen. One that I can think of, for example, and this is more of a micro level versus like long-term capitals models, multiple second order events happened. I believe that with plus some leverage. Leverage is always an important factor. But for example, in the volatility space, VXX is the largest ETF.
How does Ari assess risk and uncertainty in public equity investing?
It owns a combination of front and second month futures on volatility. Almost in the entirety of its history, you could create and redeem it, which as I was saying before, keeps the ETFs in line. So VXX, if you just look on a Bloomberg machine at any given time, typically isn't below 10 basis point discount or above a 10 basis point premium.
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Chapters
8 chapters
1
What early experiences shaped Ari Levy's interest in probability and investing?
0:00–1:24
2
How did Ari's blackjack team experience influence his investment strategies?
1:24–2:25
3
What is the significance of the Kelly criterion in risk management?
2:25–3:55
4
How does Ari assess risk and uncertainty in public equity investing?
3:55–5:05
5
What opportunities exist in small-cap markets according to Ari?
5:05–6:40
6
How does activism play a role in Ari's investment approach?
6:40–7:59
7
What lessons can be learned from historical market performance?
7:59–9:29
8
What timeless advice does Ari wish he could share with his younger self?
9:29–24:21
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