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Lesson 8

Thus he despises ‘spooking’ and thinks blackjack experts who in for that kind of cheap advantage are unworthy of their maths.  A prime motive for cheating from the dealer’s side of the table, he believes, is psychological rather than financial, in the boredom that dealers have to endure.  Instead of acting like automata, they may choose to assert their own will by interfering with the random distribution of the cards.  indeed it is perfectly understandable that dealers do not warm to people who can beat them at their own game.  The reversal of roles, whereby the customer becomes the casino, grinding out his percentage, and the casino becomes the sucker, is most unwelcome.

We moved on, coupon winners to the triumphant tune of $4.50  a head.  Griffin still finds the single-deck game intellectually fascinating, but trying to beat the four-deck games, he says, (quoting Thorp) is like breaking rocks.  As for playing without counting , he has described it, in a lapidary phrase, as ‘missionary blackjack’.
Uston has pursued a long, circuitous and exhausting campaign in the courts.  As so often happens in litigation on issues of principle  it is not easy to see who the poker winners are – apart from the lawyers, of course.  His complaints to the Casino control Commission about the conduct of Resorts in Atlantic City were not upheld.  Uston’s lawyers then appealed the decision to bar card-counters to the New Jersey Appeals ruled unanimously that casinos may not bar counters and issued an order to Resorts to allow him (and other counters) to play.  The same day Resorts, accompanied by the Commission, filed for a stay of this order pending a decision by the Supreme Court   as to whether they would hear the case.

  After many ups and downs,   Uston also won that appeal.  ‘You should have seen the casino people there, ’ Uston recalls.  ‘They were there in droves.  They had a half-a-million dollar, maybe a one million dollar show.  They had helicopters and limousines… All these casino people there, and there was nobody to testify for the counters.  It was so funny.  They had this vast report, and here I’d stayed up the night before – I was out partying – and I took a look at this thing and I said, “If they’re going to have limousines I’m going to have a limousines, too.”  It was so ridiculous.  I took a little portable typewriter that just about types… I typed a list of proposals outside the men’s room of the Howeard Johnson’s.  I’d put typewriter on a high chair…I really thought we’d lost that one, but I think we won because I got up on the stand and I cam out objectively.’  The Supreme Court decision was largely an exposition on the evolving law relating to the exclusion of individuals from public places.  The question was whether Uston would then seek the same ruling in Nevada.

He felt ambivalent about the enervating effort and hustle involved.  Then an incident happened at Lake Tahoe which made up his mind.  On a skiing a vaction with a girlfriend in early 1984, Ken couldn’t resist playing a little blackjack.  Naturally he got barred.  The scene at Harvery’s inn was typical.  After playing for about two hours, he was offered dinner on the house.  The party proceeded to the cocktail lounge where after a few minutes a security guard approached the table and in a loud gruff voice said: ‘You can’t play here any more.’  Uston replied: ‘Yessir.’

The guard repeated his ultimatum several times in a threatening voice and Uston left.  The same sort o9f thing happened, if slightly more politely, in the other places.  So he decided to file a complaint with the Nevada State Gaming Control Board asking for a hearing on whether he and other skilled blackjack players may be arbitrarily excluded from playing blackjack by Nevada casino managements. 
It is no fun being pulled up by the casino security people for counting.  Being asked to leave nicely is one thing.  But in many cases the unfortunate player is marched out to a back room, photographed and finger-printed and generally given a rough time.  This sort of infringement of civil liberties is not legal, though very few counters have had the pluck to fight back and seek redress in the courts.
One player who did was an English acquaintance of mine- he went even further and sued for damages.  The security people had jumped on him when he was winning at blackjack and accused him of cheating, by marking the tens.  He was used to being hassled, but this charged was preposterous.  This particular individual was a pro who knew more about the theory of blackjack than any half-dozen pit bosses put together – besides there was not a title of evidence  to substantiate the accusations.  But the casino chose to charge him formally with cheating.  Perhaps they thoughts he would run out of town rather than stand up and face charges in a Federal Court in Las Vegas.
On the contrary, this man was an awkward sort of customer.  He was ready to defend himself, however long the case might take.  He had been playing in the company of another young Englishman, a bespectacled young chap with a round, schoolboy face, whom any jury could see was not a heavy gambling type.  When it came to the crucial hearing this fellow donned his best Yorkshire tweed suit (the outside temperature was the usual 105 degrees) and managed to find an old school tie.  In court he looked the perfect English gentleman, or a fair imitation of one.  On the stand the casino lawyers thought they were going to turn him inside out. 

They threw a lot of questions at him about his friend cheating and finally demanded, ‘Okay, you say he didn’t count tens but don’t you think he could have found a way of cheating if he’d wanted to?’ – a leading question if you like.  Drawing himself up like an envoy presenting his letters of appointment to the Queen, the witness turned to face the judge.  ‘Your honor, I’m really awfully sorry, but I simply don’t understand the question.’ There was a moment ’s stunned silence as this mannered English drawl sliced through the cross-examination.  The judge banged his gavel down and told the smart-ass lawyer to stand the witness down.
The plaintiff was awarded a total $48,000 in damages for the treatment he’d suffered, plus loss of interest on his confiscated winnings.  After lawyer’s fees it still came to over forty grand, but it took a long time to prise the money out of the cashier’s cage.  Bob Stupak of Vegas World threatened to dump the whole lot on socially, Stupak took his defeat fairly well.  ‘Ya know, you were winning’ all night, the guys thought ya must be fixin’ the cards, or sump’n.’  It is because counters have not got the nerve, or the time and energy, to uphold their rights that Uston would like to have an established code of conduct, to enable the best players to play without being harassed.
The majority of executives in the casino industry are grossly misinformed about the fundaments of card counting and the dangers posed by counters.  Anthony Curtis, a professional counter who has also edited a gambling magazine, recalls how casino people continually asked him how much money he made per hour.  Some believed that a counter could win over 75 per cent of his bets, which would be a money-making machine indeed.  In reality not even computers can win at rates of ten per cent.  The best card counters in the world reckon on an advantage of 1-1 ½ per cent.  Moreover, the casino managements are wrong in assuming that everyone who counts cards is a winning player.
  According to Curtis, most players make half-attempts to master the intricacies of the game, and lack the self-discipline required to be successful.  The resulting equation ( ½ diligence + ½ knowledge) x (any size bankroll) = money in the bank for the casinos.  But casino personnel, from dealers on up, are terrified of low returns from their tables.  Everyone feels heat from the guy above, all the way up to the top.  And when jobs are on the line, the easiest thing to do, if it looks like someone is a counter is to give him heart, first.

The professional learns how to avoid heat.  Curtis compares the situation of the expert counter to that of a finely tuned athlete who is allowed to perform to his true ability only during training.  When game time arrives, he must conceal his talent to the point of appearing a beginner or a sucker.  This ego-deflating trait, curtis suggests, explains why so many blackjack experts have given up playing and turned to writing and lecturing about the game.  In reality, the industry has gained enormously from all the publicity about blackjack, from the knowledge, that has certainly taken hold among ‘recreational’ players, that the game can be beaten.  In that sense casinos ought positively to promote card counting.
The idea of removing human error by introducing a portable computer into play was the final step.  Nicknamed ‘George’, this device was strapped to the player’s leg and operated, believe it or not, by his toes.  As it was explained to me by Robert, a dedicated but fairly low-level counter (he took the sensible precaution of holding down a job as a sales clerk in downtown Vegas), it was not as difficult to operate as it sounds.

  The user had to learn two movements of each big toe: right toe up counted 1 and 2, left toe up 4 and down 8.  This enabled each card dealt to be entered into the computer –for instance a ten-value card would be down with both toes, a seven would be right toe up and down, left toe up.  A signal was then given to the player under the arch of his foot – da or dadaaa – whether to hit or stand.  George originally sold at $ 10,000 but came down to less than half that price as demand waned.  Most operators, according to my informant.  Suffered anguished fantasies of being caught.  But George was very effective, in poker theory.  John Gwynn, professor of computer science at California State, Sacramento, who ran some 20 million hands through a pocket computer, described its power as ‘rather awesome’.  His results indicated that with flat stakes betting, a blackjack computer could yield a player an advantage of 1.26 per cent under Vegas rules, and with a 1-2 betting ratio, 2.88 per cent.  So perhaps the casinos were right to be alarmed.
In the summer of 1985 the casino industry – ever quick to over-react – persuaded the Nevada legislature to ban the use of such computers at blackjack.  ‘The people of the State of Nevada, represented in Senate and Assembly, do enact as follows …It is unlawful for any person at a licensed gaming establishment to use, or possess with intent to use, in a game played with cards any device to assits… 1.  In projecting the outcome of the game; 2.  In keeping track of the cards played; 3.  In analyzing the probability of the occurrence of an event relating to the game; or 4.  In analyzing the strategy for playing or betting to be used in the game.’ Punishment for first offence imprisonment in the state prison for not less than 1 year nor more than 10 years, or by a fine of not more than $ 10,000, or by both  fine and imprisonment.  (It ’s probably just as well for the counters than the Nevada legislature meets only every other year.)
A point which Robert emphasized , in explaining the counter’s life and hard times to be, was the misery – and he kept repeating the word – the misery of bad losing runs, when you can’t talk to anyone about it. The gulf between mathematical theory ad the reality, as he found it, was so wide. 

The counter says to himself, ‘How come I’m losing when I do everything right, and the guy next to me, who is a complete idiot, is winning a fortune?’  The solo counter has no friends at the table, he can’t confide in anybody.  He may pace the full length of Caesar’s and back again at one in the morning, trying to find a seat in a good game, then hoof it two blocks down the strip to another place, and the same thing happens: and then when he does get a game, one of those  freak runs come up, which wipe him out.  Playing off a bankroll of $ 1,000, and betting a range of $ 5 to $20, Robert reckons that one in 20 times he’ll go broke; the answer is to treat the winning runs with great caution.  As he put it, the counter has to learn: ‘What goes around, comes around.’
How would it be, though, to be able to bet both hands and win, the dealer’s hand and the player’s hand, and still be sure of showing a profit?  Not possible, obviously.  But that, in essence, is Professor Thorp’s strategy for the stock market.  Making bets on stocks and shares in such a way that it doesn’t matter whether the market goes up or the market goes down – if the dealer wins or the player wins.  Either way the investment should still show a profit.  Alchemy?  No, just scientific method.
One summer afternoon Ed Thorp was sitting under a tree (like Isaac Newton) in the New Mexico sunshine when a powerful thought struck him.  he was reading  a little book about warrants, which are options to buy common stock.  He read of undreamed –of profits mixed with the cruelest losses.  The question which Thorp pondered was: could there he a way to realize some of the enormous profit potential of warrants and yet be safe from the losses?  What is the relation between the price of a warrant and its associated common stock?  He set himself the task of finding the ‘laws’ connecting the two prices.
Thorp saw the stock market as the ultimate game for applying the mathematical skills he had developed from learning about gambling, games and probabilities.  ‘Hedging’- a stock market term meaning covering the risk on one investment by another investment in parallel – was not a new idea, but he investigated it as a scientist, writing an elaborate series of computer programs to test his theories out.  To put it simply, when a warrant seemed over-priced he would sell it short and when it seemed under-priced he would buy it.  The formulae he devised are explained in Beat The market (1967), written with Sheen Kassouf, a like-minded colleague he met at the University of California at Irvine.  (Since those days the market and the technical opportunities of hedging have changed and the game has become tougher as other players discovered the opportunities: Thorp is now playing a revised edition.) 

Since a warrant and its underlying stock tend to move up and down together, he would reduce or hedge the risk in his warrant position by taking an offsetting first position in the stock.  His personal experience in investing with this technique and success in maintaining roughly a 25 per cent a year return led Thorp to create a limited partnership, in 1969.  Since that date, his hedge fund – run for about 70 friends and private clients- has kept going at a growth rate at a growth rate of nearly 20 per cent   a year.  Thorp terms his approach ‘getting rich slowly’.  In good times and in bad.  Thorp told me with satisfaction, the fund has never flattered.  It has shown a profit in each of the 66 consecutive quarters in which it has been operating; in the process it has  out-performed the best of the mutual funds on Wall Street by quite a clear margin.
The methods that he has used in the hedge fund owe much to the things he learned from casino blackjack.  First the fund sought high return with low risk.  He and his partners have expanded their original warrant hedging technique so that they hedge many pairs of related securities.  ‘We often don’t know what the right price of either security is, but we often have computerized formulae for comparing the value of the two securities.  If one is comparatively over-priced, we sell it short and hedge the risk by buying the comparatively under-priced security.

If the comparative mispricing disappears, we capture an excess profit.’ At any given time the fund may have as many a hundred hedged positions in its portfolio (playing a hundred hands at once!).  This diversification protects it against the occasionally poker situation which works out badly.  The fund uses a pair of advanced computers (DEC VAX 11-785) to read the ticker tape live, calculate option values and put the best option trades on the screens of the fund’s traders within a couple of seconds.
Thorp participated in the largest dollar value block ever traded on the New York stock exchange on December 1, 1983, a five million share trade in old American telephone and Telegraph versus five million when-issued shares of the new AT & T and five hundred thousand shares of each of the seven regional holding companies.  The market value of Thorp’s part of each side was about a third of a billion dollars.  When AT & T broke up, small price discrepancies appeared between the price of alone old share and the sum of the prices of the various new shares that were traded on a ‘when-issued ‘ basis.  Overall, the operation produced a profit of $2,400,000 of which $ 800,000 represented the cost of capital.  Not all that much, considering the huge figures involved?  Well, perhaps you know how to make a million dollars in a day.  I have to confess I’ve never done it.

Thorp grew up poor and as an academic he stayed poor.  It ’s all rather different now.  He uses his means to lead a free-wheeling.  Free-thinking way of life with his family in Newport, California. He likes walking trails and running marathons, looking at birds and animals, and thinking about mathematical ideas.  In 1986, for example, he took time off to fly to Australia, as the best place from which to observe Halley’s comet.  Behind his desk is a picture of a rattlesnake and another of a horned owl and chalked across the blackboard facing him, as likely as not, a string of algebraic equations.  A new system in the making, perhaps.
Ironically, one of Thorp’s most spectacular deals concerned Resorts International.  If Ken Uston had but known it, instead of getting so involved in litigation with Resorts he could have made a fortune trading the company’s stock, rather than trying to beat its blackjack games.  Back in 1972, Resorts stock was down to 8 and the warrants , entitling the holder to buy the stock at 40, were 27 cents.  Thorp’s calculations, weighing the length of time to expiration, expected interest rates and the volatility of the stock, indicated that the warrants were worth $4.

He bought all he could, 10,800, for a total outlay of $ 3,200.  But rather than risk even so modest a sum, he sold 800 shares of the common stock short to hedge his bet.  (The episode is described by journalist Andrew Tobias in Money Angles, 1984.)  A few months later the stock fell to 1 ½ so Thorp covered his short for a profit that more than paid for the warrants.  Years passed and around 1978 he began getting calls from people who wanted to buy his warrants.  They were offering $ 3 to $4, not bad for a 27 cents outlay.  By then Resorts was trading  around 15.  Thorp’s model told him the warrants were now worth $ 7 to $ 8.  So he bought more and again began shorting the stock to cover his risk.  Ultimately he sold his original 10,000 warrants for $ 100 apiece.  “The arbitrager’s approach, ’ as Tobias put it, ‘consists of finding wonderful little lapses of logic in the prices of related securities and exploiting the be Jesus out of them.’
Blackjack continues to flourish as a major gambling game, but the dilemma at the heart of it remains.  The counters will try to extract their marginal edge, the casino will strive to cut them out.  The recreational players will lose their money-fairly slowly but very surely – in effect paying for both sides.  What better epilogue to the blackjack story than ‘Bishop’ Arnold Snyder’s stirring hymn?

Onward Blackjack Soldiers
Counting down the deck
Never be loser
You can win your bet
You can Beat the Dealer
Leave him in disgrace
You can make the pit boss wish
he’d never seen you face.

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