The Science of Winning (High Stakes) by Burton P. Fabricand (1977)

The author leads us from the applicability of random walk and normal distribution to various areas of human behavior, including wealth distribution, gambling results, and in particular to parimutuel betting (read horses) and the stock market. In the author's view both of these markets are efficient in expressing market expectations of participants, but this does not mean they are "strongly efficient". Statistics and methodology are presented on beating the tracks and the stock market (although the 15-20% "take" from the top might make the tracks a harder nut to crack). Statistical formulas like expected standard deviation Ö`N`*`p``*`q (calculated from the number of trials, percent of losses, and percent of gains), chi-square tests, "t" test, ballot theorem are used to substantiate the findings. At the tracks, favorites are underbet and last minute information are not absorbed to change the expectations of the outcome. Betting on favorites and utilizing last minute information (and following a myriad of other proposed rules), might allow the reader to beat the "take" and come out ahead. The author actually takes less than half the number of pages as compared to racetrack betting to discuss his stock market approach. Going against the mainstream efficient market hypothesis (EMH), the author offers statistics proving, that corporate events (like earnings surprises) are not discounted quickly enough (one explanation could be that big market players just cannot get quickly enough in/out of a particular security and also that they do not have lots of choices of companies to invest in, so might choose to stay in a security, even if it is already understood to be declining). Of course various other discussions like this were made available on this subject, mostly proving this same point. Actual process seems simple enough, investments are selected by comparing ValueLine estimates to actual earnings reported by the Wall Street Journal (of course one can substitute other sources for this information if preferred, one could also take time to do earnings swags as the "real" analysts do), and companies with an earnings increase of more than 10% are bought and with an earnings decrease of more than 10% can be shorted. With the market's upside bias, the short positions were doing worse than the long positions. Options could also be used to simulate the same positions, or enhance the leverage. An entertaining read, although the (likely computer generated) rules on racetrack betting getting to be a tedious read (and probably even more painful to implement :) ...