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 great 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 sceptical and 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 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 years of the data to help me test betting strategies.

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

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

We even came up with a player stat-based Monte Carlo simulator that played thorugh entire 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, I found that mean reversion and public myopia could be exploited in sports wagering. (My best indicator of positive future results has 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 friendly and would bring us other bookmakers’ lines as soon as they were available. This way he would know all our plays and could bet along with us.

Afternoons we would hang large marker boards on the walls of my investment office and write down the betting lines from all our sources. 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 a problem. Sports research and wagering was causing me to neglect my family. So I  set it aside.

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

Always Have an Edge

When I would go 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. But I always needed a positive expectation of profit before assuming any risk. To me, this is what distinguished what I was doing from gambling.

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

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. And you need to consider how they will perform in the future as they attract more capital. [1]

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 this research gives you confidence. It helps you stay with your approach despite short-term fluctuations in the value of your bankroll or your investments.


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 you want is a logical basis for a wager, consistent back test results, and real-time validation of back tested strategies.

Sports research taught me the importance of having a simple strategy with intuitive logic behind it and 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 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 are considerably different. 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 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!