Pari-mutuel System

Here is a Wikipedia definition.

Parimutuel betting or pool betting is a betting system in which all bets of a particular type are placed together in a pool; taxes and the “house-take” or “vigorish” are deducted, and payoff odds are calculated by sharing the pool among all winning bets. In some countries it is known as the tote after the totalisator, which calculates and displays bets already made.

It went over my head when I first read it (Via Charlie Munger) so I dug deeper. So here is my understanding of the subject now.

This a betting system (primarily used in sports betting and horse racing), where the payoff is decided by dividing the booty (prize money — house charges) with total amount of bets made.

so let us say, ICC cricket world cup is happening and you get to bet on who wins the trophy. The condition is that the BETTING STOPS ONCE THE TOURNAMENT HAS STARTED.

an hour before the start this is what you see in stats as current bids (Money riding on each team)

Australia Rs 800,000

India Rs 200,000

England: Rs 100,000

Sri-lanka: Rs 100,000

New Zealand: Rs 30,000

This is where it gets interesting and has DIRECT Connotation with Stock market.

In the above example, total prize pool is 12 lakhs 30 thousand, House took its organizing fees at 20% leaving the prize pool at 9,84,000 (9 lakh eighty four thousand)

If Australia won and you were the smart ass to have predicted it, you got Rs 1.23 per Rs 1 invested. (984000/800000)

If, on the other hand, New Zealand won and you were the visionary to have predicted it, you got Rs 32.8 for every Rs 1 you invested. (984000/30,000)

You see the point, any douchebag looking at the past performance and team strength knows that Australia is likely to lift the world cup, but you don’t get paid for that!!! You are risking your Rs 1 to get 1.23.

Stock Market as Charlie Munger explains is a Pari mutuel system.

You don’t need to be genius to know that Asian Paints has (or had) a moat, its price action shows it, we can all see, no need for a flowery presentation. Point is, did you buy it 10 years ago.

LINDY doesn’t work in stock market, It is ARROGANT to predict 10 years in future. Warren Buffet (copied from Wayne Gretzky) puts it more eloquently,

Skate to where the puck is going, not where it has been

comments are welcome