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.
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.