My favorite game show growing up was Press Your Luck. You might know it as the one where contestants scream, “BIG MONEY! NO WHAMMY! STOP!” as tiles randomly light up the parameter of a giant prize board aptly called, the “Big Board”. Contestants would both literally and symbolically *press their luck* by pushing a handheld buzzer that made the board stop. The goal? Rack up as much in cash and prizes before landing on a “Whammy”, a little gremlin like creature that sweeps away all your winnings.
As it turns out, “Press Your Luck” is coming back to television and, along with it, the story of Michael Larson. In brief, Michael Larson had discovered a repetitive pattern in the Big Board after watching countless recorded hours of the show on VHS. Using his life savings, he flew out to Los Angeles, talked his way past a skeptical contestant supervisor and landed a spot on the show. With buzzer in hand, Larson then proceeded to obliterate the Big Board.
When it was all said and done, Larson amassed $110,237 in cash and prizes (in 1984 dollars). Naturally, CBS accused Larson of cheating but just like a stranger acting on some inside information they overheard in a Goldman Sachs elevator, he didn’t do anything wrong. Lucky for Larson, there was nothing in the rules to disqualify him of his winnings. The story of Michael Larson gets even crazier, but I will let you *enjoy* those details yourself.
What I can’t stop thinking about are the parallels between the show, Larson and the world of investing. For example, if “Press Your Luck” was a company, Larson might as well have been the foremost research analyst covering it at the time. Like an equity analyst studies a particular business, Larson poured hundreds of hours of research into the movement of the board and the game itself. In doing so, he uncovered something no else had. He acquired an edge.
Now all Larson needed was a way to take advantage of what he discovered. Like a trader needs a seat on an exchange, Larson needed a seat in the contestant’s chair. So, just like any good trader in the 1980s, he sweet talked his way into a *sale*, convincing the show’s producers he should be on the show. The commission? A chance to press his luck for the big money. Larson’s position just got elevated from stock trader to portfolio manager.
At the end of the first round, Larson was in last place due to a combination of poor timing and a lack of knowledge on areas outside of his research. Earning “spins” required contestants to answer trivia questions, something his strategy couldn’t help him with. He was underperforming, badly. However, by the second round, Larson was executing brilliantly. At 40 spins, 37 of them had been cash prizes with bonus spins. He was in control.
What I find most fascinating about this story as it relates to investing is that despite having a massive edge, Larson still had to deal with risk in its various forms. First, there was getting on the show. Then, Larson had to earn enough spins by answering some random trivia questions. Lastly, he had to account for the buzzer and other unknown variables, including what the other contestants would do with their remaining spins (Larson was unwantingly given additional spins after his massive run, thus forcing him to spin a few times more).
Ultimately, the story of Michael Larson teaches us that you simply can’t diversify, edge or cheat something that inherently deals with risk. There’s always systematic risk, arbitraging and regulation to contend with. You can have all the advantages in the world, but that won’t turn the infallible relationship of risk and reward into a guarantee. At least not with investing, anyway. At the end of the day, you’re going to have to deal with risks and press your luck.
Larson’s edge, like most loopholes found in the world of investing and finance, was eventually *regulated* away by the show’s producers through regularly changing the order in which the tiles of the Big Board lit up. As for Larson? Well, he was in fact a shady individual to begin with and it caught up to him in the end. He lost his *big money* attempting some illicit lottery schemes before ultimately succumbing to throat cancer in 1999 while being hunted down by the real Whammys known as the SEC, IRS and FBI.
Come have some fun with us as a contestant on the internet game show known as Twitter.
If the stock market was a game show, what would it be called?
— Douglas A. Boneparth (@dougboneparth) June 15, 2019