[carcanaques]

After reading the sister thread to this "Good poker players make good traders?" I thought this make spark some dialogue. I am a professional sports bettor turned trader. The transition was not easy, or at least as easy as I originally thought.

There are many similarities and many differences among each activity as you can imagine. In this thread I will focus on the key aspects of sports betting and let the more experienced traders add to the discussion with analogies, differences and other tid bits that may be helpful to aspiring and seasoned traders or those of you who are seriously considering a career in sports betting.

[carcanaques]

Correct money management is easy to explain. It is almost impossible to adhere to.

There have been about as many 'systems' for varying the bet size as there are systems to beat the craps table. None of them work and all of them do harm by giving false expectations. Double-up systems, star betting, the Kelly Criterion, etc. all have the same thing in common. They adversely affect the cash flow and they raise the breakeven percentage that must be acomplished.

Any time you vary your bet size by the slightest amount, you increase the breakeven percentage of 52.38. If you refigure your percentage after each bet, your breakeven jumps to over 55%. If you have 1 star and 5 star bets or bet twice as much on some plays, you should understand that only the large bets are meaningful to whether you will be a winner. You might as well not bet the smaller ones. In the end, they won't matter.

Some touts say you should increase your bet when you are on a winning streak and decrease it when you are on a losing streak. The key word is 'are'. If you won yesterday, you 'were' on a winning streak. But that was yesterday. If you know you will win today, why not bet it all? If you know you will lose today, you might consider not betting at all.

The problem with bet size is not the streaks, but the breakeven. If you have a 56% advantage on each bet, over 200 games you will win less than 50% about 17% of the time.You will win more than 60% about 17% of the time. Winning 100 and losing 100 with a 5% unit, you will lose 50% of your bankroll to the vigorish. (100 wins times $50 less 100 losses times $55 equals minus $500 on a $1,000 bankroll).You will lower your bet and never get even. I recommend playing no more than 2% of your bankroll. Anything over 2% is unacceptably risky, even for recreational bettors.

The reality is that each person may be trying to accomplish something different. If your goal is to afford entertainment and not go broke, that is entirely different than my goal of making a living. If you bet $100 a game on Monday night football to enjoy the game, it will cost you $5 a week if you can go 50-50. There is nothing wrong with that. It's cheaper than a movie. But that is entertainment expense, not an excellent investment vehicle.

To do sports betting in a serious way, you must treat it as you would any other business. In sports betting, your inventory is your cash. If you run out of cash, you are out of business. The old saying is that you should not use your rent money to bet with. That is true. But if you're betting for a living it is equally true that you must not use your gambling bankroll to pay the rent.

The amazing thing about sports betting is the return on investment (ROI) that is possible. And there is no magic. The return on investment is a function of the winning percentage and the amount that is invested. The amount invested is a function of how many games (investments) are bet and how much is bet on each game. It is the same as any business. How many widgets did you sell and how much did you gross per widget.

In my case, I averaged between 1,000 and 1,200 plays per year. Let's call it 1,000. My pain tolerance is a 1% unit. I will bet 1.1% of my bankroll on every bet. That means I will bet 1% of my money 1,000 times...1000% of my bankroll....That's 1000% of my bankroll. And again, I will bet 1000% of my bankroll. The same money 10 times in a year. That is why such a return is possible.

Now if I can win 56% of my plays, I will get a return on investment of nearly 100%. I will win 560 bets and lose 440 bets. I will pay a broker fee to the sportsbook of 44 bets. Therefore, I will win 76 units. (76 times 1% equals 76%). I will win $7.60 for every $100 that I bet. I will explain later how I end up with 100%.

A word here on that $7.60. I've seen many people try to make a living playing sports. Some of them think they can bet $100 a game and do it. Well, think about it. If they play 20 games a week, they will bet $2,000 and, if they are good, make $7.60 times 20=$152. At $200 a game, they can expect $308. That's pretty hard to live on. I think the minimum that must be bet is $500. That's only $760 a week and leaves no room for a bad streak. To bet $500 at 1%, you need $50,000. Like any business, you should continue to invest some of the profits to grow the business.

As soon as you can draw from the business, you should put yourself on a salary. That way you can know what to expect for an income and won't be bothered by the short term vagaries of Lady Luck.

You just need to know the number of bets, the amount per bet, and the win percentage, and you will know what to pay the IRS next year.

After 19 years, I know the number of plays I have each year. I know what my bet size is. And with 1,000 plays, the standard deviation for my win percentage is 2. So I know I will win between 55% and 57%. Sounds rather dull when I put it that way. And I guess it actually is. Bernard Baruch, the great financier, said he always looked for boring businesses. They were well run, without surprises and he knew what to expect.

I know what to expect. With a 56% expectation, your bankroll would reach a new high only 5% of the time. Nineteen out of 20 days you will be below your bankroll high. The novice thinks you should have more money each day. I also know that with a 56% win rate and 100 bets a month, I will lose money every 9th month. Good money management is aided by knowing what to expect.

As a final note on bet size, I should add that I used a plateau system.

I bet 1% of my bank and continue to flat bet until my bank grows by at least 25%. Then I recalculate the 1%. Thus if I started with $10,000, I would bet $100 a game until my bank grows to at least $12,500. At that point, I would refigure my unit to $125. It would stay there until I reached at least $15,625. That way my actual risk reward ratio doesn't get too high. The other thing that I do that is unique and rather arguable is that I never lowered my bet. Remember, if you vary the bet, your breakeven goes up. At a 1% unit and 19 year's experience, I'm comfortable that I can ride through a losing streak. If you lose 10 games at $200 a bet and lower the bet to $180, you must win 12.2 bets to get back to even. That is how I got my 100% annual ROI. My actual bet went up during the year as my bankroll reached higher plateaus.

[Soultrader]

Thank you carcanaques. Very interesting post.

[BlowFish]

One of the key differences between sport betting (or any other betting) and trading is you have to 'actively participate' to get in and to get out too.

Dunno this may have been mentioned in the poker thread, I didn't read that one. I believe Douglas talks about it in one of his books. Tied to this is that with most forms of betting you know exactly how much you have at stake and what the payout will be ...not so trading (though on the whole using fixed stops and targets lets you choose those parameters). IMO exits are so very much more important than entries.

Another thing that springs to mind is that sport betting is far from zero sum with a bookie setting odds.

Interesting post - the thing you highlight (bet size) and what that leads on to (risk of ruin) is key in both.

Cheers.

[aiki14]

My experience is that the best traders are math and computer science folks. Certainly it is they who are getting the jobs at GS and the hedge funds. Those are the guys managing my investment portfolio. The fantasy of sports betters or poker players making good traders is a pipe dream based on the fact that anybody can be a sports better or poker player, but few can be a stat/arb guy or first in your class at MIT or Harvard, and pass the interview with Goldman or Cerberus.

[carcanaques]

Originally Posted by aiki14 »

My experience is that the best traders are math and computer science folks. Certainly it is they who are getting the jobs at GS and the hedge funds. Those are the guys managing my investment portfolio. The fantasy of sports betters or poker players making good traders is a pipe dream based on the fact that anybody can be a sports better or poker player, but few can be a stat/arb guy or first in your class at MIT or Harvard, and pass the interview with Goldman or Cerberus.

The old elitism is better argument. Ever read "When Genius Failed?"

I think sports bettors, poker players or garbage collectors can be outstanding traders managing their own capital and make a very handsome living. Not everyone wants to work for GS or has a need to.

[carcanaques]

Originally Posted by BlowFish »

Another thing that springs to mind is that sport betting is far from zero sum with a bookie setting odds.

Trading isn't a zero sum game after commission. It's a negative expectancy game. The bookmaker takes a vigorish (5% for online operators, 10% for Vegas sportsbooks) and brokers take a commission. In fact, the odds are better with a bookie, because only the winners (you read that right, it's not the losers) pay the vigorish, but in trading, both sides pay a commission.

[aiki14]

Originally Posted by carcanaques »

The old elitism is better argument. Ever read "When Genius Failed?"

I think sports bettors, poker players or garbage collectors can be outstanding traders managing their own capital and make a very handsome living. Not everyone wants to work for GS or has a need to.

I guess the reason for a book like "When Genius Failed" is because it is much rarer than "When Average Failed", given the choice I'll bet on genius, the LTC debacle not withstanding. That's an argument for diversification not a shot at intellect.
I have no doubt that sports bettors,poker players, or garbage men can be good traders, but it would be because they followed a good trading strategy and had discipline in their methodology, not because they were good gamblers or garbage men. I trade full time and will take a gambler on the other side of the trade over the Goldman guy anytime.

As a total off topic is it better or bettor? I wrote both a bunch of times and couldn't decide.