Wee Willie Keeler was one of the greatest contact hitters in baseball. One year 30 of Keeler’s 33 home runs were inside the park. Keeler’s motto was, “Keep your eye clear, and hit ‘em where they ain’t.”
I have tried to do this by focusing on underexploited investment opportunities. In the 1970s that meant stock options. In the 1980s I had great success with managed futures. Also in the 1980s, I had a family member who bet on football games. He knew I used quantitative methods, so he asked me to take a look at betting certain NFL home underdogs. I was skeptical and reluctant at first, but then obliged him. I was surprised to discover a profit opportunity there.
I became intrigued with the idea of exploiting inefficiencies in the football betting market. There were no sports databases back then and almost no published sports research. So I hired some UC Berkeley students to go through years of the data with me and manually test betting strategies and angles.
After we had a stable of successful angles, I put one of the students on a bus to Reno each weekend. Encouraged by our profitable results, I expanded my research to include college football and basketball.
I focused on areas where the oddsmakers were not paying enough attention, such as game-time weather conditions, team mean reversion, public overconfidence, and over-inflated betting lines.
We even came up with a player-based Monte Carlo simulator that played through entire baseball games. It gave us an edge early in the season before others figured out the impact of off-season trades.
One of my research assistants continued to analyze sports after graduation. He started a basketball information service then became Vice President of Basketball Operations for the Dallas Mavericks when they won the NBA championship.
Our biggest edge came from betting against public biases. For example, teams that showed very poor performance in their last game were often underbet in their next game. As in stock market investing, I found mean reversion and public myopia could be exploited in sports wagering. As a money manager, my best indicator of positive future results had always been when investors overreact to short-term losses and closed out their accounts. Sports bettors were no different. Going with a team when no one liked them anymore seemed to be a sound strategy.
Issues with Doing Well
As we continued doing well, some bookmakers would no longer take our action. A smarter one became my friend and brought me other bookmakers’ lines hoping so we could make all our bets through him. This way he would know our plays and could bet along with us.
Afternoons we would hang a large white marker board on the wall of my investment office and write down betting lines from all our outs. Fortunately, we had very few visitors back then! As friends found out about my success, I began managing a small sports betting syndicate.
I had a 12-foot BUD (Big Ugly Dish) installed at my house and would watch as many games as I could. That became a problem. Sports research and wagering were taking over my life and causing me to neglect my family. I also became concerned with security. Initially, we would settle up our non-local accounts through FedEx. Eventually, someone there figured out what was in the packages from the Caribbean, and they would show up empty. So I would fly to Las Vegas every few weeks to settle up large amounts of cash. That’s when I decided to quit doing sports.
Looking back at my sports activities, I realize now that I learned some valuable lessons that helped me become a better researcher and investor. Ed Thorp once said, “In the world of investing, gambling is a wonderful teacher. It teaches you how to manage your money, place your bets, and keep your cool.”
Here are some things I learned:
Be Even Minded
Emotional overreaction is the biggest enemy of investors. Fear and greed can cause us to react in ways that are not in our best interests. Sports wagering teaches you equanimity if you are ever going to be successful. No matter how good you are, there will always be losing streaks. Those who do well with sports or any other type of investing learn to keep their eye on the big picture and ignore short-term noise. Being able to ignore losses is the biggest advantage I think I now have over most investors and investment professionals.
Have a Long-Term Proven Edge
When I would visit Nevada with friends, I never played casino games. When they asked me why, I replied, “I don’t gamble.” They would laugh knowing I was betting tens of thousands of dollars every week on sporting events. But I always wanted a positive expectation before taking on risk. To me, this is what distinguishes investing from gambling.
My need for a positive expectation also led me to the under-exploited niche of dual momentum investing. Most of those who invest have little or no edge. It is hard to have an advantage in doing what everyone else is doing. You would be better off investing in low-cost passive index funds. The components of dual momentum, relative strength and trend, are the only factors I know that have outperformed their benchmarks for hundreds of years.
Look to the Future
You should have a healthy dose of skepticism about strategies that differ from the market portfolio. This means looking beyond academic studies. You need to be aware of how strategies perform in real-time. And you need to consider how they will perform in the future as they attract more capital [1]. The limitation to sports wagering now is being able to make large bets.
Dual momentum is generally ignored as an investment strategy. I don’t expect that to change anytime soon due to behavioral factors. These include anchoring, aversion to tactical investing, home country bias, and familiarity bias. There should be plenty of future capacity for dual momentum ivestors.
Focus on Process, not Outcome
Those who wager long enough will experience a number of bad beats. You can’t control short-term outcomes. The measure of success should be if you can stick with a sound strategy during times of adversity. If you make the right decisions based on the information you had at the time, then short-term outcomes are irrelevant.
Do Your Homework
Betting lines, like financial markets, are mostly efficient. The way to be confident you have an edge is through extensive research and years of real-time results. Doing research also gives you confidence. It helps you stay with your approach despite short-term fluctuations in the value of your bankroll. Disciplined bankroll management is important for long-run success with sports or any investment.
Keep Things Simple
A serious potential problem in model development is expecting ex-ante results to hold up out-of-sample. Selection bias, over-optimization, and model overfitting are serious issues in both sports and non-sports research. If you keep tweaking your strategies, it isn’t hard to find betting angles that give you over 60% winners. But these rarely hold up in real-time. What you need is a logical basis for your wager, consistent backtest results, and real-time validation of your backtested strategies. The same is true for any type of quantitative investing.
Sports research taught me the importance of having simple strategies with intuitive logic and plenty of backtest data. This is also what led me to momentum investing. Dual momentum is simple, logical, and supported by over 200 years of backtesting validation across different markets.
Have Realistic Expectations
If you win a profitable percentage of your sports bets, you are still going to have some serious losing streaks. You have to accept this. Warren Buffett is quoted as saying the # 1 rule of investing is to not lose money, and the # 2 rule is to never forget rule #1. Yet Buffett’s Berkshire Hathaway was down more than 50% twice during the past 20 years. Despite this, Buffett has done well. Confidence in your approach and emotional discipline is what you need once you have a proven edge.
Expecting to consistently win at sports more than 60% of the time is unrealistic. Expecting to beat the markets most of the time on a short-term basis is also unrealistic. Here is the percentage of time that Global Equities Momentum (GEM) featured in my book outperformed the S&P 500 index over various periods since 1971:
Results are hypothetical, are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Please see our Disclaimer page for more information.
Over one year or less, GEM didn’t do much better than a coin flip. But over five or more years, results are considerably different. Patience is important whether you are a traditional investor or speculate on sporting events. Warren Buffett was right when he said the stock market is a mechanism for transferring wealth from the impatient to the patient.
Leave Your Opinions at the Door
You need to forget your likes or dislikes (favorite or non-favorite teams) and go where the data takes you to be a successful sports bettor. The same is true with investing. I have seen plenty of investors disregard good opportunities that conflicted with their prior beliefs and biases.
To be a good winner over the long run, you need to be a good loser over the short run. You can do this if you have a proven edge, a simple approach, and realistic expectations. Good luck to you!
