When handicapper and Washington Post columnist Andrew Beyer walked into the Laurel Race Course's Sports Palace on a Saturday in 1990, he knew he was going to hit the "double triple," a difficult, exotic wager that requires the bettor to pick the first three horses in two races.

He knew he was going to hit it. That's why he bet $4,578, the second-largest wager of his long handicapping career. He hit, and walked away with $134,161, the biggest payoff he'd won since he started picking horses as a Harvard undergrad in the 1960s. Five months later he hit the same wager for $195,000. Again, he knew he would hit.

Beyer writes about the experience in Beyer on Speed, one of four books he's written about horse racing. Beyer's a serious handicapper, but he's also a marvelous craft writer. I read him for the same reason I read Robin Givhan's fashion articles in the Post, The New York Times' Paul Krugman on economics, and James Surowiecki's financial columns in The New Yorker. They bring us grit and sparkle from places near and remote.

And Beyer has lessons to teach investors. Although investing isn't gambling, both require analytical problem-solving and a good understanding of probability -- or, put another way, tools for coping with uncertainty.

Discipline
What does Beyer's experience with the double triple tell us? Walk away when you don't know, or can't get a handle on the risks, and bet big when the opportunity arrives. Beyer tells us this over and over. "The secret of the double triple," he writes, "is to wait for the track to offer a worthy betting opportunity rather than to pursue a big jackpot just because it's there."

And again. "Because of the degree of difficulty, a bettor should pass the twin trifecta (double triple) if there are too many unknown quantities in the races, such as first-time starters or horses who have been laid off." ("Laid off" means a horse hasn't raced in a while.)

Horseracing, like investing, offers investors thousands of opportunities, but few really good ones. Just as smart poker players fold more hands than they play out, top handicappers wait patiently to make their big bets.

This is the same discipline Berkshire Hathaway (NYSE: BRK.A) Chairman Warren Buffett stresses. It's the principle of inaction. When there's nothing to do, no opportunity to seize, do nothing. Go home and read annual reports. When the market puts Coca-Cola (NYSE: KO) on sale at 13x forward earnings, a firesale price for one of the world's most enduring businesses, bet big. Buffett started buying Coke shares in 1988 and had invested $1 billion for a 7% stake in the company by the spring of 1989. His investment more than tripled in three years.

(One word of extreme caution here. Buffett, to put it mildly, really knows what he's doing. The "bet big approach" is an advanced strategy. It isn't a recommendation for your retirement savings, or for the casual investor in any way. Index funds are a solid vehicle for the average investor.)

Evolution
Beyer has watched the horseracing world change, too, and helped change it. For most of this century, bettors believed class was the most important trait in winning horses. Horses with the best pedigrees -- the bloodlines with speed, stamina, and winning titles -- were favored to win races, even when facing horses that looked faster.

This started changing in the mid 1970s when Beyer published and popularized use of his speed figures, a numerical rating system that made it possible for bettors to compare horses' performances on different tracks, at different distances, and in different conditions. Beyer made good money using this system until the 1980s, when the game changed again.

"The effect of the speed figures' popularity was inevitable," Beyer remembers. "For most of my life as a horseplayer, I could have reaped a profit by betting blindly on the horse in the race who had earned the highest [speed] figure in his last start. Now this was no longer true." 

Speed figures became commodities even before the Daily Racing Form started publishing them in 1992. At the same time, many hunch players had abandoned the tracks for state lotteries, and taxes had steadily increased. These forces converged to make horse racing a much harder game, even for pros.

In a close parallel to investing over the last century, the horseracing market became more efficient. Handicappers had become smarter. Information traveled quickly. Efficiency in the market doesn't mean there aren't opportunities, just that opportunities are harder to find. There isn't money just laying around for the casual fan or investor to step in and collect.

This is where we can learn another lesson from Beyer. He adapted to the changes. Beyer learned how to watch races skillfully and interpret more subjective information such as how pace, ride, and track bias affected each horse's performance. Once he learned how to interpret this information correctly -- the practice is called "trip handicapping" -- he used it in tandem with speed figures to continue winning.

What's useful here is that Beyer knew there was more to horseracing than analyzing speed figures, just as there's a lot more to investing than looking at price-to-earnings ratios. In fact, he figured this out pretty early, though his sense of what to look for and his ability to interpret races improved over the years.

"Here it was, the Secret of Beating the Races: There was no one secret," Beyer wrote in Picking Winners. "The horseplayers like me who searched for the great underlying truth of handicapping were as misdirected as the alchemists who spent their lives trying to find the philosopher's stone. The game is diverse and it is perpetually changing."

We have to change, too.

Fundamentals
The final lesson from Beyer also comes from Picking Winners, his first book. Written in 1975, the book starts out with Beyer introducing the fundamentals. You must be able to read the Daily Racing Form. You must understand its simple boxes of numbers, which can tell you that a horse rallied strongly at the race's end, or that he showed tactical speed, or that it's clear his conditioning is improving, or that he's a horse that can't go more than seven furlongs.

These are the basics, and though everyone has access to them, they are essential. As investors we must be able to read financial statements. We must be able to compare operating expenses between two companies in the same industry, we must be able to weigh a company's debt relative to its cash, we must be able to determine whether it's managing cash efficiently, we must know its advantages relative to rivals and suppliers.

It doesn't take long to learn the basics, but it takes time and it's hard to become fluent. And even this is just the beginning, both in horseracing and investing. "Learning how to analyze the data in past performances," Beyer writes, "is an absolutely essential skill, though it is rarely enough to make a horseplayer a consistent winner. A horseplayer who relies solely on the information in the past performances will know only what everybody else does."

So we have to learn more.

Looking back over Beyer's approach, you can see its balance. He focuses on discipline: Know when to bet; know when to walk away; know when to bet big.

He focuses on understanding the market. For investors, that doesn't mean predicting which way the market's headed. It means understanding that the market changes. Like any evolving system it's becoming more efficient, which makes it harder to compete.

Because it's changing, we need to change with it. In Latticework, Legg Mason fund manager and author Robert Hagstrom reminds us that investors used to price stocks based on book values, then it changed to dividends, then earnings, then cash flow, then return on invested capital. We have to keep up with the changes to understand the game. Importantly, this doesn't mean turning in the wind whenever a new financial wind blows, but understanding the basics and making sensible changes along that path.  

Finally, Beyer focuses on the fundamentals. You can't write books before you know the alphabet.

Have a great day.