Wednesday, June 14, 2006

Gambling and Investing Part 2 4 comments

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Previous parts: Gambling and Investing

The World Cup is now in full swing and the impact on market trading activity has materialised as predicted -- unit volume and/or dollar volume has been consistently below the billion-unit/billion-dollar mark since the tournament started, suggesting traders' attention has indeed been actually diverted. And why not --- both stock market and World Cup sports betting offer avenues for making money. In fact, there can be cross-pollination of ideas and philosophies across both domains --- another reason for the latter's popularity with traders.

A blow-by-blow comparison of the two:

- The objective should be to aim to make money, and this objective is often clearer for market traders than for sports bettors, who might put money to "inject excitement" into a game they are watching. Play to win, and not to entertain.

- The sports gambler scans all available bets and associated odds, just as you would do a stock screen to single out stocks with good potential. Obviously you don't over-diversify and over-buy; you pick good bets (in your judgment) to put your hard-earned money in
- The sports gambler might have a particular scanning "philosophy" in mind in order to focus: bet on long shots (with good odds but low probability) or on favourites (with less-than-even odds but high probability), in the same way that the market player might choose high risk-high return growth stocks or low risk-low return stalwarts. It is interesting and I'm not sure why it happens, but it pays to bet with the trend, like in the stock market. The last World Cup was full of upsets and would have served the long-shot bettor well if he had spotted it early; this World Cup has seen the favourites winning most matches and few draws, and would have favoured gamblers who bet on favourites.
- It will do well to be aware of the dynamics of the process. For example, Singapore Pools odds typically come with an approximate 10% house advantage (can be calculated by summing up the probabilities of all possible events ---> should be more than 1), which means the gambler's picks should usually be in excess of 60% (and not just an average 50%) over the long term in order for him to make money. This uneven playing field is reflected in the stock market with the information advantage of the institutions, which the trader should always be aware of and alert to.

Keeping track
- It doesn't make sense to monitoring the teams one bets on too closely especially if the amount is small, but anyway there are just a few things to track, in my opinion: long-term reputation, short-term form, motivation for the match (whether they need to win or only draw, for example). This is analogous to the track record, near-term profit outlook and management's shareholder orientation that we often look for when monitoring a company we are interested in. In fact, it is a good way to remind ourselves that all organisations, ultimately, are comprised of humans and hence we are buying into hopes for their outperformance: for soccer teams, into outperformance of a team of 11 players, whilst for a company, into outperformance of a team of far more individuals (but still humans and not faceless digits).

Risk management
- Some sports gamblers buy multiple bets in a single match to "hedge" and cover various possibilities. For example, they might buy total score 1 goal, 2 goals, 3 goals. While there is nothing wrong with this, it hints of excessive diversification, which dilutes returns --- analogous to what stock market gurus typically advise against. Instead, the advice is to focus on a few which you are relatively sure on --- and this advice, I think, applies to both stock market and sports betting activities. Of course, there are people who have tuned such a "multiple bets" strategy to a fine art, so I'm just generally speaking.

Money Management
- Obviously we do not dump all our "World Cup Sinking Fund" into the first few matches, because we want to reserve it for the latter stages of the tournament. The fact is, we are not so sure of the bet that we are ready to put all the money into the bet. So, what's different for market trading? A cash reserve should be maintained to manage and take advantage of market uncertainty.

Of course, obviously there are many features that mark the differences between sports betting and market trading, but I wish to single out two most important ones: the first is the time factor, which I have discussed in my previous article on this topic; the second is the inability to liquidate a sports bet subsequent to buying it: one either wins or he loses everything. This is opposed to the stock market which provides a continuous spectrum of prices over time and allows one to dispose of any purchase easily, without having to wait for any milestone. It would be great if one could do so for sports betting: for example, the Czech Republic was a 2.9:1 longshot to top its group; however after its 3-0 thrashing of the US its odds has been shortened to 1.9:1. Imagine if a bettor (such as me) had put money early on the long odds and then watched it shorten down: if there existed a secondary market for sports bets, I would have been able to sell off at a profit, without having to wait for the all-or-nothing outcome several days later.




Anonymous Anonymous said...

Interesting post and obviously there are analogies between betting and investing.

Munger or Buffett recently distinguished between betting and insurance, by pointing out that insurance performed a necessary function; betting does not.

I am reminded of one of the highest IQ people I have known (who was earning some colosssal salary in the States doing the statistical work for a marketing firm) who spent three months full time trying to beat the odds at blackjack in Las Vegas. I asked him how it had gone on. He said he had "only" lost $8,000, and that had covered the enjoyment he had got (along with the free drinks and so on they give high rollers). (Just incidentally to this read a book by Al Alvarez called The Biggest Game in Town - an absolute classic on the top poker players with great stories such as how one top player would eg bet $100,000 against a better opponent at golf on who could sink the next putt; the thought of losing $100,000 would so put the better player off that he could not concentrate, and would duff the stroke).

The point I am trying to make is betting is unnecessary, so unless you are a genuine expert (very very few) simply don't do it, if your intention is to make money. If you have to bet on the WC, and don't want to send your money down the WC, why not just drastically scale things down and just bet with $5 bets.

6/17/2006 4:24 PM  
Blogger DanielXX said...

Having said all that I've said, I only place relatively small amounts on sports/WC betting. The greatest issue I have with gambling is that it is an all-or-nothing situation. Some people think it's great that they can say, make 20% return so quickly (say, betting on France to beat Korea), but they forget that if they lose the bet, ALL capital is wiped out (as compared with the stock market, where worse come to worse, you might lose 50% if the stock comes up with a really bad profit warning).

And of course, gambling is essentially short-term in nature, which means it's so much more about luck than anything else; compared to investing, where short-term it's also about luck (random component) but long-term it's about fundamentals (systematic component).

6/20/2006 12:45 AM  
Anonymous Anonymous said...

To use probability in both gambling and investing is not for everyone. People may use probability if they understand probability and it's worth the effort to use probability.

For me, I may use probabiltiy in investing and not so in gambling due to the small gambling stakes.

Sound gambling and correct investing may go hand-in-hand in theory. In practice, it is difficult to carry one's conditioned behaviour in one activity to the other.

6/24/2006 6:55 PM  

Gambling and investing are a little different.

12/11/2012 4:29 PM  

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