What My Derby "Doubler" Can Teach Us About Investing

The 141st running of the Kentucky Derby was not going to pass me by this year without a challenge...

I was hanging out with some financial friends last week when the question got popped along with a bottle of wine:

"Who do you like in the Derby?" I was asked.

I'd never really thought of it, although I enjoy the excitement of the race. But when I heard a few of my friends around the table talking about betting on the long shot, I had to open my mouth.

"You never bet the long shot," I said, knowing that in the business of options trading, nothing could be more clearly stated.

With that, I took a bold step that not only paid off handsomely for me, but can also pay off for my readers.

Indeed, this financial lesson in investing learned from the Derby will be of greater long-term importance to you than remembering the name American Pharaoh...

Putting Probability in Your Corner

After listening to my pronouncement, I was challenged by one of my friends who said, "Ok, Options Guy, tell us what you would do?"

I was determined to show these guys that it is possible to make a higher probability bet with decent returns by hedging your bet across the horses with the highest probability of winning.

So I opened up an online derby account, put $500 in it, and proceeded to bet the entire amount across three horses, American Pharaoh, Dortmund, and Carpe Diem, to prove a point.

Each had different odds of winning, so I averaged my bets according to payout, betting more on American Pharaoh and less on the other two. In the end, American Pharaoh won the race, paying me off and doubling my account, despite the other two horses NOT winning.

After cashing in on the winnings, I had some time to think about the strategy employed to virtually assure my earnings bonanza. I quickly realized my strategy has nothing and everything to do with stocks.

Six Takeaways for Successful Stock Trading

Trading stocks and playing the horses are two entirely different vehicles of exchanging money. One is regulated, monitored, even audited, while the other one is for entertainment and gambling.

Stocks, when properly managed, offer wealth creation, income, and retirement. Playing horses is for someone who has plenty of money in the stock market and is just looking for two minutes of entertainment.

But the question remains... can a seasoned handicapper on the track teach you a thing or two about trading stocks and options?

Absolutely.

You can start by taking these tips right to the market:

1. Do Your Research - Like the horses, picking stocks is all about research. Technical, fundamental, seasonal... the research choices are limitless. But the worst thing to do when it comes to picking stocks is to pick one on a "hunch," or because you "think" it's going up.
2. Utilize the Experts - Experts in the field spend a great deal more time than the average retail trader analyzing every angle of a company or stock. They may have found something you overlooked that could confirm or deny your research. Use them! There are plenty out there, both online and through your broker.
3. Stay with the Big Race for Starters - Ok, so I can't let this story get away without saying what happened after the Derby. After collecting my winnings, I thought, "I wonder if this method works on any race?"

So I put a small wager on an unknown carriage race and lost. I did this again on an Australian Steeplechase and lost again.

You know what I learned? Not only do I know nothing about horse racing, but I am applying my nothing knowledge to the smallest and least-bet races. These small horse races are like trying to trade penny stocks. Stick with the Big Race, initially (small-caps can provide incredible returns, but typically require expert guidance), and in the case of stocks, it means the popular, liquid stocks.

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4. Diversify - Remember I bet on 3 horses to win; instead of a static 1-13 chance of winning, I increased my chances of winning to nearly 1-3.5!
5. Time Decay Happens FAST - In most horse races, we are talking 2 minutes - the fastest trade for me this year. And what can you take away from this? That the shorter your time frames in holding anything, the higher probability of the success you want!
6. Anything Can Happen - Finally, know that anything can happen, and expect it. Nobody I knew expected "Carpe Diem" to finish in the middle of the pack, and nobody I knew expected such a huge drop on Twitter Inc. (NYSE: TWTR) and LinkedIn Corp. (NYSE: LNKD) last week either. Expect anything to occur, because it probably will...

Now on to the Preakness Stakes!

More from Tom: Tom Gentile's free, twice-weekly Power Profit Trades shows you how to pick the low-risk, high-probability trades that make fortunes. Click here to start receiving it, and you'll also get Tom's investor briefing, How to Make an Easy 100% Return on the World's Most Valuable Company.