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What is are 'find a 2-to-1 shot that pays 3 to 1' and 'pick their spots'? Munger noted that many analysts look at huge bodies of past data looking for clues, which results in enormous misspent effort (generally proportional to the IQs of those doing it). True investing is really more like betting against a parimutuel system, trying to find a 2-to-1 shot that pays 3 to 1. Value investing is looking for a “mispriced gamble.” Buffett chimed in, saying that they would have no edge if they tried to evaluate every horse. They have an edge only if they pick their spots. The danger of relying on historical statistics or formulas is that you end up betting on a 14-year-old horse with a great record but is now ready for the glue factory.
Sep 28, 2018 1:07 AM
Answers · 6
This is a probability reference. A 2:1 spot would be a situation where event "p" occurs twice as much as event "q". Paying 3:1 refers to a gambling or investment wager that pays out three dollars to every winner who bet one dollar. Finding a 2:1 event that yields the investor a 3:1 payout would give the investor a highly profitable long-term arrangement. Thus, an investor who holds his money until he finds these advantageous situations would be good at "picking the right spot".
September 28, 2018
This is gambling terminology. The use of the word "shot" here is a specialized usage, meaning a bet or a chance or an attempt. Note also the word "longshot" uses "shot" in a similar sense. To "pick your spots" means to be selective, and choose to gamble only when the odds are in your favor, that is, when the probability of success and the payoff from succeeding outweigh the risks.
September 28, 2018
"To find a 2 to 1 shot that pays 3 to 1" This is the language of gambling. A "2 to 1 shot" is an investment that returns double what you bought it for. Similarly, a "3 to 1 shot" would be an investment that returns triple what you bought it for. From the context, it would appear that they are talking about something that is inaccurately rated as returning double your investment, when in fact it will really return triple your investment. "Pick your spots" This is similar to "cherry-picking" or picking only the best of something. Buffett (presumably Warren Buffett?) is saying that you cannot analyze every single "horse" (meaning investment opportunity). Instead, you have to be able to have some criteria to identify what the best investment opportunities are of all the ones that are available. Please let me know if these explanations help you.
September 28, 2018
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