by Daniel Putnam | January 31, 2014 1:12 pm
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:
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.
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?
Anyone who has ever bet football, or any other sport for that matter, knows the lure of the Super Bowl. It’s big, people are talking about it, and you can watch your bet play out in real-time.
Obviously, that doesn’t make the Super Bowl a good bet – but that usually isn’t a deterrent to the undisciplined gambler.
This same issue crops up in trading because of the media attention lavished on certain high profile stocks. Think of the hours of TV programming and countless articles devoted to the simple question of whether or not Apple (AAPL) is a buy.
But why should traders care? Apple is no more or less likely to offer a trading opportunity in any given month than an under-the-radar mid-cap energy stock.
Just as obscure major league baseball games offer better value opportunities than the Super Bowl, so too can stocks with a smaller following be more profitable than the Apples of the world. From a trading standpoint, there really shouldn’t be a distinction between Apple and Weatherford International (WFT).
Unfortunately, many traders trip themselves up on this simple aspect of the equation.
Experienced gamblers know that there’s much more money to be made by being a contrarian than by trying to bet on the most popular teams. The betting public tends to overrate the teams that they see on TV and hear about most frequently, while underrating those that are less popular. This is reflected in point spreads and betting lines, so bettors who back the popular team will have to pay a premium to do so.
In sports gambling, some of the best plays are often big underdogs where bettors can get a value vs. the betting public. Similarly, traders who go against the grain rather than playing with hot stocks – and hoping they can unload their position to the greater fool before the negative headlines hit – will see better trading results over time.
One of the best articles you’ll ever see on successful sports betting is this piece by the publisher Harriman House promoting a book titled “Sports Betting To Win – The Keys To A Winning Mindset” by Steve Ward. The author cites key components of successful sports gambling, including taking personal responsibility, accepting losses, managing risk, and focusing on “getting rich slowly.”
Again, if this sounds familiar, it’s because it is – traders know that this approach, along with several other points cited in the article, is critical for success.
The kicker comes at the very end, when we learn that the author also coaches traders and is the author of a second book titled “High Performance Trading – 35 Practical Strategies and Techniques to Enhance Your Trading Psychology and Performance.”
If anything helps illustrate the link between the two worlds, it’s this. And it also provides a lesson: just as gamblers can take a value-oriented approach of the stock investors, traders can easily reduce their activities to gambling if they approach the market the wrong way.
Keep this in mind as you sit down to watch the Super Bowl on Sunday night – especially if you’re among those who took the 3-1 odds and bet that it snows during the game.
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