April 12, 2017

Lessons Learned from Sports Investing

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 always tried to do the same thing by focusing on underexploited investment opportunities. In the 1970s that meant stock options. In the 1980s I had success with managed futures.

Also in the 1980s I had a family member who bet on football games. He knew I invested using data-driven quantitative methods, so he asked me to take a look at betting NFL home underdogs. I was reluctant at first, but then obliged him. I was surprised to discover there was a profit to be had there.

I became intrigued with the possibility of exploiting the inefficiencies in the football betting market. There were no computer-based sports databases back then and almost no published sports research. So I hired some UC Berkeley students to go through lots of the data and help me test betting strategies.

After we had a stable of successful angles, I put one of these students on a bus to Reno each weekend. Encouraged by our early results, I expanded my research to include all sports, both pro and college.

I focused on areas where the linemakers were not paying enough attention, such as game time weather conditions, team mean reversion, and public overconfidence.

We came up with a player stat-based Monte Carlo simulator that predicted the outcomes of  baseball games. It gave a good edge early in the season before others figured out the impact of off-season player trades.

One of my research assistants continued to analyze sports after graduation. He became Vice President of Basketball Operations for an NBA championship team, then VP of Basketball Strategy and Data Analysis with another NBA team.

Our biggest edge came from betting against public biases. For example, teams that showed very poor performance in their last game are often under bet in their next game. As with stock market investing, mean reversion and public myopia can be exploited in sports wagering. (My best indicator of positive future investment results has always been when investors overreact to short-term losses and close out their accounts.)

Issues with Doing Well

As we continued to do well, some bookmakers would no longer take our action. One became a friend and would bring us other bookmakers’ lines as soon as they were available. This way he would know all our plays and would bet along with us.

Afternoons we would hang large marking boards on the walls of our investment office and write down the betting lines from all our sources. We often found exploitable disparities in the lines. Fortunately, we had very few office visitors back then! As others found out about my success, I began managing a successful 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 was the problem. Sports research and wagering was causing me to neglect my family. So I eventually set it aside. (I may take up the challenge again now that I no longer have family responsibilities.)

Looking back on my sports activities, I realize now that I learned valuable lessons that helped make me a better researcher and investor. Here are some of them:

Always Have an Edge

When I went to Nevada with friends, I would never play casino games. When they asked why, and I said, “I don’t gamble,” they would laugh. They knew I was betting tens of thousands of dollars every week on sporting events. I always needed a positive expectation of profit before assuming any risk. To me, this is what distinguished what I was doing from gambling.

Most of those who invest actively have little or no edge. You cannot have an advantage doing what everyone else is doing. The same applies to stock market investing. You would be better off investing in low-cost passive index funds. My need for a positive expectation led me to the little exploited niche of dual momentum investing.

Do Your Homework

Betting lines, like financial markets, are mostly efficient. The only way to be confident you have an edge is through thorough research with plenty of data. Doing thorough research gives you confidence. It helps you stay with your approach despite short-term fluctuations in the value of your investments.

To be a successful investor, you need to keep from doing what everyone else is doing. Herding is a powerful behavioral instinct, but it can lead to mediocre or worse investment returns.  You should have a healthy dose of skepticism about strategies that differ from the market portfolio. This also means looking beyond academic studies. You need to be aware of how strategies actually perform real time in light of scalability and liquidity issues. And you need to consider how they will perform in the future as they attract more capital. [1]

Keep Things Simple

Selection bias, over optimization, and model overfitting are serious problems in both sports and non-sports research. If you keep tweaking your strategies, it isn’t difficult to find betting angles that give you over 60% winners. But these almost never hold up in real time. What we want to see is a logical basis for a wager, consistent back test results, and real-time validation going forward.

Sports research taught me the importance of having a simple strategy with intuitive logic behind it. You also need plenty of backtest data. This is what led me to momentum investing. It is simple, logical, and supported by over 200 years of backtest validation across nearly all markets.

Have Realistic Expectations

If you win a proftable percentage of your sports bets, you are still going to have some serious losing streaks. You just have to accept this. Warren Buffett is often 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 15 years. Despite this, Buffett has still done well. Confidence in your approach and emotional discipline are what you need once you have a proven edge.

Expecting to consistently win at sports much 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:

Time horizon
% of time GEM outperformed the S&P 500
3 months
52%
1 year
55%
3 years
71%
5 years
85%
10 years
99%
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, those results change considerably. Patience is important whether you are a traditional investor or a speculator on sporting events. Warren Buffett had the right idea 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 and go where the data takes you to be an effective sports bettor.  The same is true for investing. I have seen many investors disregard or override their strategies when these conflicted with their cherished beliefs. Some close their accounts or decline to open new accounts because of behavioral biases or fears. To be a 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, realistic expectations, and have done your homework. Good luck to you!