Luck is for Losers

Tweet

Real estate has proved to be even bigger than blackjack. Over the years, Kaplan bought and developed about $100 million worth of property for tenants that include Bank of America and Walgreens. In 2000, he joined FreshAddress, which had been founded a year earlier by a pair of entrepreneurs, Austin Bliss and Bob Mack. They spent several years developing and patenting software designed to track address changes; today, the company is profitable on sales of more than $5 million. But Kaplan doesn't plan to stay small. He and his partners are discussing how to make more from clients like CVS, Reader's Digest, and, ironically, the Venetian Hotel Resort Casino. "We're going to do one thing and win by doing it better than anybody," says Kaplan. "It's like blackjack, where we stayed ahead of the casinos because we knew more about it than anyone else."

In fact, both his ventures are a lot like the blackjack teams, as Kaplan tells it. What he has accomplished in real estate and is trying to accomplish at FreshAddress draw extensively on such strategies as performance analysis and extensive intelligence gathering, skills he mastered while running the teams. The underlying goal, he says, is to "rejigger the risk-reward equation such that you can lower the risk for yourself while the market-determined reward remains the same." Here, Kaplan explains his approach to business, based on 15 years of winning at blackjack.

Take risk out of the game

"You are always betting in proportion to your capital. If you lose money, you lower your bet. So theoretically, your risk of ruin is always zero."

Kaplan is a walking oxymoron: the risk-averse gambler. He won't play until he has taken every possible measure to ensure he will win. At cards and in business, he never bets above his conservative comfort level, and he refuses to indulge reckless speculators. "No one should purchase any units who cannot afford the loss of his entire investment," reads a warning on his prospectus for the 1992 limited partnership agreement.

So Kaplan looks for opportunities where math and research -- rather than skill or luck -- determine the outcome. Blackjack is one such opportunity. "Everyone thinks you can't win at blackjack, because if you can, how could those casinos make so much money?" says Kaplan. "But if you analyze the game properly, you can come up with a strategy that gives you a positive expectation."

The basis of Kaplan's strategy, which he learned from Beat the Dealer, a 1962 book by Edward Thorp, involved assigning number values to high and low cards as they are played. Aces, face cards, and tens are worth -1; two through six are worth +1; and seven, eight, and nine are worth 0. Card counters keep a running total in their heads. The higher the total, the fewer aces and face cards that have been played, and the more likely a rich vein of such cards is imminent. Because face cards and aces favor the player, higher counts elicit higher bets. Players using this system have a 1 percent to 2 percent advantage, but results swing wildly in the short term. (Kaplan once lost 20 hands in a row, a one-in-a-million probability.) So it usually takes many, many games -- 500 to 1,000 hours of play -- to achieve the desired return.

Team play, which Kaplan learned in Las Vegas from Blackjack Hall of Famer Ken Uston, allows for far more time at the table. It also allows some players to act as "spotters" -- monitoring the game and betting conservatively, then signaling discreetly to "big players" who join the action when a deck is poised to spit high cards. Big players always bet high, so they don't tip off casino personnel by changing their behavior just as the cards get hot.

Kaplan relied heavily on his university's computers -- mainframes with punch cards in those days -- to run every possible hand and calculate the optimal player response. Blackjack, in this context, becomes an if-then proposition. "There was no flexibility about what players did at the table," says Kaplan.

On any given Saturday, Kaplan might have had teams plying Las Vegas, Foxwoods in Connecticut, New Orleans, Montreal, and Lake Tahoe. Every six hours, team members would meet at designated locations in their respective cities and calculate how much they were up or down; then they would call an 800 number and leave their results for Kaplan. Kaplan would determine whether the teams should, as a group, raise or lower their bets and by how much. "Say we started with a million dollars, and now everyone has played, and we're down $100,000," says Kaplan. "Now we have nine-tenths of our capital base. Before we were betting $1,000; now we're going to bet $900. You are always betting in proportion to your capital. If you lose money, you lower your bet. So theoretically, your risk of ruin is always zero."

 PREV  1 | 2 | 3 | 4 | 5  NEXT 

Read more:

Leigh Buchanan

Leigh Buchanan is an editor at large for Inc. Magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture, and she contributes Inc.'s capsule book reviews, "A Skimmer's Guide to the Latest Business Books."

Sign-up for our Start-up Newsletter

Email Address: