Warren’s Dale Carnegie tests of behavior were handicapping: a mathematical experiment on human nature. The data he collected gave him the odds that Carnegie was right.
This way of thinking was an extension of his childhood hobbies of racing marbles and collecting bottle caps. Warren’s passion for handicapping, however, extended to many other subjects, especially his own lifespan. His interest in longevity was no mere abstraction. Ernest Buffett, to whom Warren was extremely attached, had died in September 1946 at age sixty-nine. Warren was sixteen. Of his four grandparents, only Stella, age seventy-three, remained alive, confined in the Norfolk State Hospital. Yet long before Ernest’s death, since his days of calculating the odds on life expectancies of hymn composers, Warren had been preoccupied with his lifespan. The data points from these latest family events did nothing to ease his mind about either longevity or insanity.
The art of such handicapping is based on data. The key was having more information than the other guy—then analyzing it right and using it rationally. Warren had first put this into practical use as a child down at the Ak-Sar-Ben racetrack, when his friend Bob Russell’s mother introduced the boys to the world of pari-mutuel betting.
Warren and Russ were too young to wager, but they quickly figured out how to make a buck. Amid the cigarette butts, beer slops, old programs, and hot-dog remnants in the grime and sawdust of the Ak-Sar-Ben floorboards were thousands of discarded tickets, peeping out like mushrooms on the forest floor. The boys turned themselves into truffle hounds.
“They call that ‘stooping.’ At the start of the racing season you get all these people who’d never seen a race except in the movies. And they’d think that if your horse came in second or third, you didn’t get paid, because all the emphasis is on the winner, so they’d throw away place and show tickets. The other time you would hit it big was when there was a disputed race. That little light would go on that said ‘contested’ or ‘protest.’ By that time, some people had thrown away their tickets. Meanwhile, we were just gobbling them up. We wouldn’t even look at them when we were working. At night we’d go through them. It was awful; people would spit on the floor. But we had great fun. If I found any winning tickets, my aunt Alice, who didn’t care anything at all about races, would cash them in for us, because they wouldn’t cash them for kids.”
Warren wanted to go to the races all the time. When Mrs. Russell wasn’t taking him, “my dad would never go to the races,” says Buffett. “He did not believe in the races.” Instead, his parents let his great-uncle Frank, the oddball of the family, take him. Frank had long ago reconciled with his brother Ernest and had eventually married a woman whom the family referred to as “the gold-digger.”1 He had no particular interest in the horses, but he took Warren to Ak-Sar-Ben because his great-nephew wanted to go.
At Ak-Sar-Ben, Warren had learned something about how to read the tip sheet, and it opened up a whole new world. Handicapping horses combined two things he was very, very good at: collecting information and math. It was not unlike counting cards at blackjack, except that the winning hand had four legs and ran around a track. Soon, he and Russ knew enough to put out their own tip sheet, the cannily named Stable-Boy Selections.
“We got away with it for a while. They weren’t the hottest sellers in the world. I mean, a couple of little kids selling this thing we typed up in my basement on an old Royal typewriter. The limiting factor was carbons in those days. You could probably only get in five or so carbons. But I got on the Royal and Bob Russell and I doped out the horses and then we typed up this thing.
“We were in the track, yelling, ‘Get your Stable-Boy Selections!’ But the Blue Sheet was the number-one tip sheet, and the racetrack was getting a commission on it. The Blue Sheet sold for a little more. At twenty-five cents, we were a cut-rate product. They shut down the Stable-Boy Selections fast because they were getting a cut on everything sold in the place except for us.”
When the Buffetts moved to Washington, D.C., the only plus for Warren was the chance to upgrade his handicapping skills.
“The one thing I knew about Congress was that Congressmen had access to the Library of Congress—and the Library of Congress had everything that had ever been written. So when we got to Washington, I said, ‘Pop, there’s just one thing I want. I want you to ask the Library of Congress for every book they have on horse handicapping.’ And my dad said, ‘Well, don’t you think they’re going to think it’s a little strange if the first thing a new Congressman asks for is all the books on horse handicapping?’ I said, ‘Pop, who was out there at the county fairs stumping for your election? Who was down there at the packinghouses ready to get to the cops if something happened?’ I said, ‘And you’re coming up for reelection in two more years. You’re going to need me. So this is payoff time.’ And he got me hundreds of books on horse handicapping.2
“Then what I would do is read all these books. I sent away to a place in Chicago on North Clark Street where you could get old racing forms, months of them, for very little. They were old, so who wanted them? I would go through them, using my handicapping techniques to handicap one day and see the next day how it worked out. I ran tests of my handicapping ability day after day, all these different systems I had in my mind.
“There are two kinds of handicappers. There are speed handicappers and class handicappers. Speed handicappers figure out the horse with the best times in the past. The fastest horse will win. Class handicappers feel that the horse that’s run against ten-thousand-dollar horses and done well and now is running against the five-thousand-dollar horses will beat them. Because, they say, the horse runs just fast enough to win.
“In horse racing it pays to understand both types of handicapping. But back then I was basically a speed guy. I was a quantitative guy to start with.”
As he tested, thought, and observed, Warren discovered the Rules of the Racetrack:
1. Nobody ever goes home after the first race.
2. You don’t have to make it back the way you lost it.
The racetrack counts on people to keep betting until they lose. Couldn’t a good handicapper turn these rules around and win?
“The market is a racetrack too. But I was not developing elaborate theories in those days. I was just a little kid.”
Betting in Washington was ubiquitous.
“I would go down to my dad’s office fairly often, and there was actually a bookie in what was then called the Old House Office Building. You could go to the elevator shaft and yell ‘Sammy!’ or something like that and this kid would come up and take bets.
“Now, I used to do a little bookmaking too, for guys who wanted to bet on the Preakness or something like that. That’s the end of the game I liked, the fifteen percent take with no risk. My dad, you know, was struggling somewhat to keep this under control. He was amused by it to some extent, but he could also see how it could veer off in the wrong direction.”
During summer vacations, Warren returned to Omaha and went stooping at the Ak-Sar-Ben track, this time with his friend Stu Erickson.3 Back in Washington, he found a new friend to go to the racetrack with, someone who could advance his handicapping skills. Bob Dwyer, his high school golf coach, a potbellied, enterprising young man, made far more than his teacher’s stipend by selling life insurance and ice chests and other things during the summer when school was out.4 The other members of the golf team viewed Dwyer as tough and crusty, but he took a shine to Warren, who had a way about him and played enthusiastically despite his glasses always fogging up.
One day Warren asked Dwyer to take him to the races. His coach said he needed permission. “The next morning,” Dwyer says, “bright and early, he came prancing in with a note from his mother, saying it was all right to go to the races.” So Dwyer wrote Warren some phony excuse to get out of class5 and then they took the Chesapeake & Ohio from Silver Spring, Maryland, over to the racetrack in Charles Town, West Virginia. Going to the races with a teacher polished Warren’s sophistication about handicapping. Dwyer taught Warren advanced skills in reading the most important tip sheet, the Daily Racing Form.
“I’d get the Daily Racing Form ahead of time and figure out the probability of each horse winning the race. Then I would compare those percentages to the odds. But I wouldn’t look at the odds first, to avoid prejudicing myself. Sometimes you would find a horse where the odds were way, way off from the actual probability. You figure the horse has a ten percent chance of winning but it’s going off at fifteen to one.*
“The less sophisticated the track, the better. You have people betting on the jockey’s colors, and you have them betting on their birthdays, you have them betting on the horses’ names. And the trick, of course, is to be in a group where practically no one is analytical and you have a lot of data. So I would study the forms like crazy when I was a kid.”
One grade behind Warren at Woodrow Wilson but slightly older, Bill Gray went to a few horse races with him. “He was very sharp with numbers. Very talkative.6 Very outgoing. We would discuss baseball, batting averages, sports.7
“He knew which horses he was going to pick the minute he got off the train. He would go down to the track and say, well, this horse is too much weight, or this horse, where he’s come in the last few races has not been good enough, or his times are not good enough. He knew how to judge the horses.” Warren made six- to ten-dollar bets, sometimes on the nose.* He only bet big if the odds looked good, but he had a way of risking some of his hard-earned paper-route money on the right horse. “He might change his mind as the different races came forward,” says Gray. “But for a sixteen-year-old, that’s not so common, you know?”
Then one time, Warren went to Charles Town by himself. And he lost in the first race. But he didn’t go home. He kept on betting and he kept on losing, until he had lost more than $175 and his pockets were stripped nearly bare.
“I came back. I went to the Hot Shoppe, and I treated myself to the biggest thing they offered—a giant fudge sundae or something—and there went all the rest of my money. While I ate, I figured out how many newspapers I had to deliver to make up what I had lost. I was going to have to work more than a week to make back the money. And I’d done it for dumb reasons.
“You’re not supposed to bet every race. I’d committed the worst sin, which is that you get behind and you think you’ve got to break even that day. The first rule is that nobody goes home after the first race, and the second rule is that you don’t have to make it back the way you lost it. That is so fundamental, you know.”
Did he realize that he’d made an emotional decision?
“Oh, yeah. Oh, I was sick. It was the last time I ever did anything like that.”
*That is, the horse would pay out as if its odds of winning were only 6.7 percent. Thus, if it won, the payout would be 50 percent bigger than the horse’s track record suggested should occur. A handicapper would take this bet even on the worst horse in the field, because the expected payout is so high compared to the odds. This is an “overlay.”
*Betting “on the nose” is betting to win.