The Parlay

On the North American standardbred racing circuit, the race track that was known as the 'graveyard of champions' was located at Queen St. and Kingston Rd., a few steps from the lake in east end Toronto. Sold to developers - as were all city centre ovals over there - during the 1980's real estate boom, Greenwood was capable of inducing the most unexpected results from the very best, and presumably the most predictable, pacing and trotting horses. The case of a three year old pacing colt with the endearing name of 'Guts' comes to mind.

Shipped north from the Meadowlands to get a race in on this fabled death trap a week in advance of the million dollar North America Cup, Guts found himself entered against local stock of no great merit and went to post at a perfectly legitimate one-to-twenty - if one didn't know that he was a touch sore and therefore had almost no chance of negotiating one and a half trips around Greenwood's 5/8 mile without breaking stride. And behind him he dragged a parade of parlay bettors who, in turn, set up possibly the best bet ever placed by the punter penning this blog (who did know that Guts was lame, by the way).*

In short, the cinch favourite went to the front, opened by four or five lengths, and, knees mercilessly aching in the second of the three tightest turns on the continent, he jumped - and finished last in a six horse field. So did the parlay crowd - out of a sixth floor window - as the many tens of thousands of dollars amassed from the successful laying down of money to win, place and show on similar unbeatable short priced chalks went up in smoke.

At the top of the page is clip from a spreadsheet comparing the results from parlaying winnings from an investment system that returns 10% a year for 9 years to one in which the annual profits are removed, reinvesting only the principal in the system, and invested in fixed income at 3%. The parlay system returns, naturally, more than the other. The second chart shows the effects on equity of various losses in year 10. At about -24%, the ten-year returns are approximately equal for both systems - if no leverage is used in the parlay system. At the six times that seems to have been the quite typical margin before the markets went off stride, that number is considerably closer to zero, and explains fairly simply exactly why there is no money left.

Not that we are proponents of limiting individuals' abilities to enter into contracts, even if they are operating from some misguided belief that history has been vanquished, but there is something wrong with an incentive system that encourages managers to ignore the Greenwoods of this world.

*The writer was an avid observer (and bettor on the anomalies regularly found therein) of the pari-mutuel betting pools, which are real-time public information at North American race tracks. In the case of this race, so much money was bet to show on the favourite that, had he finished in the money, the other two horses sharing the third place pool would have also paid the minimum of $2.10 - probabilities overwhelmed by the sheer weight of cash. The effect was that virtually no show money was placed on any other horse. When Guts failed to make the board, the winner (by far the best of the rest) paid the anti-probable $9.20, 11.40 and 15.50. The writer had done his calculations prior to going to the window, and took the last option.

Guts, by the way, went on to earn nearly two million dollars in that year, 1984. But not at Greenwood.

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