Saturday's running of the Preakness Stakes might be even more important than the Kentucky Derby, because it will decide whether or not we can root for a possible Triple Crown winner.
As CNBC reported earlier, marquee horse races like the Preakness draw an enormous amount of interest from occasional fans who want to make a rare wager on horses—and most of this is dumb money. On a normal Saturday in America, about $50 million is bet on all horse races in the country. For the Preakness alone, we should easily see over $150 million—meaning approximately $100 million is the extra betting just for that one race. The spikes are from people who don't usually bet on horse racing; we can call them the "dumb money."
The inverse of the stock market
That's why you can make money betting on the Preakness—because there are so many newbies who bet without knowing what they are doing. Contrast that to the stock market, where the vast majority of assets is owned by the smart money—professional investors who know what they are doing. That's why individual investors who try to stock pick on their own almost always lose out—they are the dumb money. It's almost impossible for them to squeeze a profit when they are competing against well-informed pros.
The opposite is true at the Preakness: Because most of the wagers are not coming from the pros, they will create opportunities for smart gamblers to find trades that have a positive expected value—you should actually mathematically expect to make money.
We consulted with Bill Hessert, co-founder of Derby Games, a technology company that focuses on consumer apps for betting on horse racing. Hessert's years of experience and data have shown him some of the basic mistakes that people make—the types of wagers that a pro like Hessert himself would know to avoid.
Don't make these dumb money bets
Overhyped favorites: "The biggest favorite tends to have odds out of line with their chance of winning," said Hessert. "Too many people will bet on American Pharoah (winner of the Kentucky Derby)," which means that you should probably not do the same thing. Even if American Pharoah wins, "it wasn't a good mathematically sound bet to make."
The biggest long shot: "The odds for the biggest long shot should be even longer than you see," said Hessert, because lots of people take a chance on a big pay day. Tale of Verve is the biggest long shot at 30-1, which should more realistically be anywhere between 50-1 and 100-1 according to Hessert's calculations. You're paying too much at 30-1 for what you should be getting. "Again, it's not a bet you'd make money on in the long run."
Post position seven: "People just like to bet on lucky number seven, regardless of horse quality." This effect might sound silly, but it does matter. "People just like to say 'give me a hundred bucks on seven,'" said Hessert, moving the odds against you. Seven might be a lucky number, but it's not a good bet come post time. That means watch out for horse Divining Rod, who got assigned post seven. "The odds shouldn't be that strong for him."
Gray-colored horses: "People bet on gray horses because they visually stand out, but they aren't any faster," Hessert said. For the most part, the horses we see in races are brown, and the rare gray-colored ones tend to get bet on more than they should be. This year it will be easy: There are no gray horses in the Preakness. But you've been officially warned for the future. Avoid them because their odds are skewed against you.
Why the Preakness matters so much
"Bettors like to bet on and root for long shots," said Hessert, "but the industry will be rooting for American Pharoah." The Preakness is always smaller than the Kentucky Derby, but if American Pharoah wins, Belmont will far exceed the Preakness. Consider last year's example with California Chrome having a chance at the Triple Crown: 102,199 people in the crowd wagered a record $19.2 million on track, with a total of $151 million bet across all sources—another record.