After two weeks of hype, it’s almost Super Bowl Sunday – or as I like to call it, “New Year’s Eve for gamblers.”
Just like Dec. 31 brings out partiers who couldn’t tell the difference between Absinthe and kiwi-flavored Mad Dog, the Super Bowl is a siren song for newbie bettors who can’t resist the urge to cough up their hard-earned cash.
All is not lost for these Arnold Rothstein wannabes, however: The world of football betting actually has more than a few lessons for traders. The two worlds may be far apart, but some of the keys to success are very similar. Football point spreads are a market in their own right, after all.
With that in mind, here are five things that experienced sports bettors could impart to traders on the eve of Super Bowl weekend:
Selectivity is key
Sports bettors need to lay 11-10 odds when they place a bet; in other words, you earn $100 if you win but you need to pay out $110 if you lose.
Since the point spread makes each game a 50-50 shot (in theory) and laying 11-10 odds means you need to win 52.4% of the time to break even, gamblers have the odds stacked against from the start. Bettors need to be selective as a result, since the more bets you put down, the more likely these odds will work against you.
Investing is similar in that three factors combine to create a headwind when traders are too active: commissions, taxes, and, for those who trade options, slippage caused by having to navigate the bid-ask spread.
Together, these forces lead to a gradual leakage of cash out of trading accounts for those who aren’t attentive. Traders therefore need to be pick their spots and avoid the urge to over-trade.
In a perfect world, trades would be limited to two or three of the best ideas each month. Unfortunately, traders also tend to be “market junkies” just as gamblers tend to be sports fans – so this type of disciplined approach is often easier said than done.
The Super Bowl coin flip
This brings us to the next issue – the folly of trading around news events.
One of the worst gambling propositions in the world is betting the Super Bowl coin flip. Bettors willingly line up to lay 11-10 odds on what is literally a 50-50 shot! Why would anyone do this?
Most likely, it’s the need to be in on the Super Bowl action – even if that action means jumping into a pool of gamblers who, collectively, are mathematically guaranteed to have a net loss.
The analog in the financial markets is making trades based on specific news events, such as earnings reports. Sometimes this can work, when expectations are so far in one direction that it sets up a positive risk-reward play. Sometimes. More often than not though, for every Netflix (NFLX) or Facebook (FB) that beats, there’s an Amazon (AMZN) to disappoint.
The solution: just stay away. There is an infinite amount of trading possibilities available on any given day, why bet on a binary event without a true informational advantage?