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A Sporting Chance

Steve Abramowitz

WANNA BET TOM BRADY has the real golden arm? I’ll take the other side of that wager. At the Borgata Casino in Atlantic City in 2009, Patricia Demauro’s golden arm rolled the dice 154 times over four hours and 18 minutes without losing.

Yup, football is back and sports gambling is on a roll. Several states have legalized it, and many others are proceeding in that direction.

My 35-year-old son Ryan, a math jock and sports fanatic, has already signed on. He’s found the adrenaline rush of gambling to be a welcome break from the demands of teaching high school and coaching basketball.

I was concerned about the well-known nightmares of sports gambling, so it was a relief to learn that Ryan was betting responsibly and managing to hold his own. Like other professional sports bettors, he’s developed a statistical model that discourages betting on intuition and hunches.

Ryan and I speak often. He bounces ideas and tactics off his old man, a former academic researcher. As I learned more about his approach, I recognized it as eerily familiar. I had been a fervent options and individual stock trader when I, too, was in my 30s. I’ve become fascinated by the parallels between what Ryan is doing today to inform his bets and what I did when I was trading options and stocks.

First, let’s take a glimpse into the machinations of the sports bettor. Assume the data suggest that the home court advantage in college basketball is exaggerated. Those who erroneously believe that a raucous arena necessarily dampens the performance of the visiting team will bet too heavily on the home team, and thereby skew the odds. The savvy sports bettor takes the other side.

When I was laying bets on Wall Street stocks, I remember fortifying myself with a desk strewn with newsletters that claimed they could transport me to a lifetime of leisure and abundance. Sports bettors, similarly, have instant access to a wealth of online information on teams and players, as well as courses on sports betting.

Just as I haunted numerous trading conferences back in the day, sports bettors now convene at workshops where like-minded mathematics wizards from elite universities hold court. Today, bettors—like traders—rely heavily on statistical analysis.

They employ predictive models to spew out data to show when the sports bookies are off. I relied on charts and moving averages to learn what stocks had the momentum to warrant the purchase of their options. Now the hunt is on for similar opportunities created by discrepancies between the naïve money and the forecast of what the betting odds should be. In today’s parlance, most hardcore sports bettors are quants.

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With apologies to Warren Buffett, let’s consider value investing from the vantage point of the sports bettor. Buffett compares a company’s intrinsic value to its stock price. To paraphrase Benjamin Graham, the greater the discrepancy, the larger your margin of safety. Similarly, the size of the spread between the output of the gambler’s model and the casino projection is his margin of safety. The greater the discrepancy, the higher the probability of a profit.

The drama of the Super Bowl gives savvy bettors a value play. Flush with anticipation and rooting for excitement, the public is more likely to believe that a kickoff will be returned for a touchdown than is warranted by the objective data. The emotional money on the “yes” bet is unrealistically large. This leads the sports bookies to increase the odds in favor of the “no” bet, which is now feverishly being taken by the smart money.

Jim Cramer rants that diversification is the only free lunch on Wall Street. That’s also true for sports bettors, who must spread their bets across many games to avoid a wipeout. Still, stock fund managers often invest more money in their high conviction picks, or even run a concentrated fund to prevent dilution of their investment philosophy. Bettors similarly put down more money when their models flash that the sports bookies’ numbers are less accurate.

Of course, in the long run, the returns from owning stocks should be superior to those of all but the most skillful sports bettors. Stock investors may get an average annual return of 10% over 20 years, with almost no transaction costs. Sports bettors, on the other hand, must beat the house, which uses finely tuned computer models to make fat profits at the gambling public’s expense. Like the options traders of old, bettors must endure harrowing losses and unpredictable cash flows.

I’ve come to see the sportsbooks as similar to a broad index fund, a benchmark even the most storied mutual fund managers have not been able to consistently surpass. I limped off the stock trading playground by my 40th birthday, chastened and transformed into a dedicated mutual fund investor holding for the long-term.

I’ll confess to still having apprehensions about Ryan’s new pastime. I hope there comes a time when he parlays his profits as a sports bettor into stakes in mutual funds and exchange-traded index funds. There he could apply his aptitude and knowledge to enhance his financial well-being and harness the magic of compound interest. Then again, I need to remember Ryan is entitled to live out his own dream, not mine.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.

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steve abramowitz
steve abramowitz
2 months ago

Hi David

You have a lot of self-awareness and seem able to keep things under control. Most hobbies are not free. Just be careful because the pull of the rush can be addictive.

David J. Kupstas
David J. Kupstas
2 months ago

I need me one of those courses for sports bettors. I, too, am fascinated by the concept. I enjoy the rush of placing (small) bets but do not have the knowledge to sway the results in my favor. So for now it’s just a tax I pay to the betting sites.

steve abramowitz
steve abramowitz
2 months ago

Hi Nate

Not sure, but I think you’re uncomfortable with my association of the sports books with index funds. I was only using the comparison as a metaphor to highlight the books as a formidable benchmark by which to judge performance/skill. You may well be correct in implying that this was a loose and unfair leap. On the other hand, if your question is a literal one, yes, you can invest in the gaming stocks themselves or through any of the several thematic e-sports ETFs.

Nate Allen
Nate Allen
2 months ago

Oh no, I was actually wondering if it was possible to invest in gaming entities. I wasn’t sure if they were mostly privately held or publicly traded.

steve abramowitz
steve abramowitz
2 months ago
Reply to  Nate Allen

Hi Nate

Sorry for misunderstanding your question. Now I get it! After consulting with some people who should be in the know, I’ve come up with a “probable” answer. Some sports books belong to the casinos proper, some are affiliates and some are independent. I am not aware of any that are public companies. Hope this helps.

Nate Allen
Nate Allen
2 months ago

So…
Can we buy stocks of the “broad index funds”? (i.e. The sports books.)

Michael Crosby
Michael Crosby
2 months ago

Wow Steve, what an enjoyable article. Thanks so much.

steve abramowitz
steve abramowitz
2 months ago
Reply to  Michael Crosby

And I thank you! Every writer hopes to move his readers, whether to inform, provoke or enjoy.

Andrew Forsythe
Andrew Forsythe
2 months ago

Steve, thanks for an interesting and different article. I think the most important words in it are: “Sports bettors, on the other hand, must beat the house…”

The best lessons are those we learn personally and the hard way. I hope your son learns the lesson you’d like him to, and without taking too big a hit to his finances.

steve abramowitz
steve abramowitz
2 months ago

Hi Andrew

Very well-taken. Alberta and I are trying to be aware of the personal and financial risks of supporting our child’s pursuit of an unconditional dream. As a researcher, I have seen many experiments fall flat and if need be am prepared to pilot the plane to a soft landing.

Guest
Guest
2 months ago

I have a son in college who has owned the same broadly diversified portfolio of stocks for about 8 years and he’s done well with it. Last school year he started making modest sports bets with a portion of his summer job earnings and has continued to do the same this school year. I also bet modestly on sports/dogs/Jai alai when I was in college so who am I to be upset with him. However, I will be very upset if either (a) he decides to sell any of his shares of stock to get $$ for sports bets or (b) his grades begin to reflect more time spent on betting than studying. So far, no signs of either and I truly don’t anticipate any.

steve abramowitz
steve abramowitz
2 months ago
Reply to  Guest

Hi. Very much appreciate your support and understanding. Others of course may not agree with us, but I feel even as you are holding your breath you are trusting your son to grow into his own person. Ryan taught probabilities using examples from sports betting, an outgrowth of the creative energy unleashed by his passion. “You may strive to be like them, but seek not to make them like you.” (Khalil Gibran, The Prophet).

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