Why Sports Wagering is a Sound Investment

There has always been spirited discussion in relationship to investing in the stock market versus the merits of being a professional gambler. For years the folks who head on over to Wall Street to make a living have been looked upon as individuals with a strong analytical business mind, that have had years of college education. This background has persuaded many individuals with excess capital to trust their finances with these speculators.

On the other side of the fence sits the sports handicapper, who for many years, has been watching and reading about various sports teams and individuals. They analyze the draft every year, study the injury report, pour over statistics that reveal how their team plays at home, on the road, indoors or outdoors, cold or warm weather and then decide with at least a 50% chance of winning, what team or individual they should wager on. These sports handicappers have a strong mathematical mind and are extremely talented in the area of statistics and basically have earned their masters degree in sports wagering.

Why then are 'Sports Hedge Funds' not more prominent in our society these days? According to Mark Cuban the billionaire owner of the Dallas Mavericks and a person who is highly respected as a brilliant business mind, these funds should be available. Some will argue that there are presently groups such as he refers to and have been prevalent for years and they are called syndicates.

But no where in your local neighborhood is they an outlet that will take some of your excess income and wager it on a sports match, that will possibly earn your substantial financial rewards. Sure you can make a deposit at SportingbetUSA.com and then make your own picks, but analyzing sports may not be your forte and you’re looking for a financial sports advisor.

What Cuban has to say!
I have bet on stocks long and short for about 15 years now. I’ve done very well. There has already been one hedge fund started based on my trading results. In those 15 years, I have learned that despite all the claims and books written about efficient markets, the trading of individual stocks are not efficient. There are always people trading on better or worse information. There are always people trading on emotion rather than logic. There are always people trading on hopes of the big hit. What Peter Lynch would call the '10 Bagger'. They were gambling. Nothing more. Nothing less!

It’s not unusual to hear people refer to trading stocks as no different as going to Vegas. They are right. Gambling is gambling.

The question really is, which gives the opportunity for a better outcome?

If you play the slots in Vegas, you can read what the payout ratios are for each casino, 97 pct. 98 pct. If you play long enough, the casino will end up with 2 or 3 pct of your money. Unless of course you go up to the winning side while you play, and quit while you’re ahead.

The stock market equivalent would be to buy an At The Money Long Term (LEAP) Put for 2 or 3 pct of the stock price. The put would protect your downside for several years, and the stock would only have breakeven or upside potential over that period. It’s a nice thing, except that it’s much, much, much more expensive than 3 pct. As a point of reference, IBM which is trading at about 94 today, has a price of $5.90 for Jan 2006 95 puts. Its $7.90 for Jan 2007 puts. Just to protect yourself on the downside for less than 2 months, till the 3rd week of Jan 05, will cost you $2.40, or about the same percentage as the hold the house puts on you in playing slots in Vegas.

Of course that’s for slots, if you play blackjack, the odds are better and every now and then in your favor. If you play poker, you are playing against the other players, and the house only takes its commission. Just like your broker takes its commission.

Unlike the stock market, you know the rules exactly. You know without question, the house is going to play by the rules. The gaming commission appears to actually enforce rules of play, unlike the SEC.

And then there are sports bets. Like any other investment or bet, the question always come down to whether there is good information available, who knows how to use it better, and who is the competition and are they smart or not.

Honestly, I don’t know if the best and brightest go to Wall Street or Vegas. I don’t know the number of gamblers via sports books in Vegas vs. the number of gamblers, I mean investors, in the stock market.

I do know this. Most casual gamblers, who are the majority of the money spent, go to Vegas expecting to lose money. It’s part of the entertainment experience. People put money in mutual funds and in their brokerage accounts and pick stocks expecting to make money. They don’t find any value in losing money on a stock, fund or other traditional investment. That changes the opportunity completely.

How efficient can a market be when the majority of investors expect to lose money? The sportsbooks know this. They know the difference between smart and stupid money.

They set odds in order to attract as much emotional, stupid money as it possibly can. It also knows that this emotional money will skew the odds and bring in the 'smart money'. As a result, they have learned to lay off their investments so that they are just taking their cut off the dollars invested rather than trying to outsmart the smart.

To me, this suggests the smart money is better than just good. It’s very good.

Which raises the question of 'How did the smart money get smart', and do they get better returns on their bets than investors can buying the S&P500? Can it significantly outperform the S&P as this new fund would be expected to do?

The smart money doesn’t brag about their results, but in the minimal reading and conversations I have had, it’s the same people coming back over and over again. The smart money people are doing something right on a repetitive basis.

When you think about betting on sports, there really is far better information about your local sports team than there is about any local business in your market. The local papers cover the team every day. The local TV station gives a report about every game. There are radio stations that cover them for hours at a time. That’s far more information than you get about Tyco or Computer Associates or NFI.

In sports, when someone does something wrong, they pretty much tell you the next day or two. When someone is suspended you know it, or someone’s hurt, they report it, and do a better job of policing that than any industry watch group.

If you want statistics, my goodness, there is no comparison. You can tape everything and create your own stats, which I’m sure every 'smart money' gambler does. There are public play-by-plays of every game. There are websites that analyze every which way from Sunday every action and inaction of every player in the game.

There also is no such thing as insider information either. Player and team reps can’t talk to known gamblers, but do they really need to?

Reporters are there after every practice to interview the players and coaches. They ask the same questions that every gambler wants to know, if only so they know who to pick for their fantasy teams. They also get to see and report on who is there and who isn’t and who is limping and who isn’t.

That’s far better than we get from public companies. Not only can they not disclose material information on a daily basis, they try their very best to hide their actual performance when they are required to supposedly disclose all information.

Public companies play so many games with their numbers its ridiculous. Should they expense options or not? Per forma vs. GAAP? One time write offs? Buying company after company? Writing down inventories then reselling them?

My favorite is beating the estimates by a penny quarter after quarter. Could you imagine a team that beat its competition by 1 point every game? Business, like sports, is not that predictable.

That’s not to say that the information is so good that this is a slamdunk investment. Sales don’t get closed, product cycles get pushed back, drugs don’t work as expected and players drop passes, miss shots and get hurt.

The argument can be made that this is much riskier than a bond, where unless the company goes out of business, you get paid the interest rate. Pick a strong company or the government and you are relatively safe. All true. That’s why i love bonds.

You could also make the argument that when you buy a stock, you own part of a company. Legally it’s true. In practice it’s not. For non-dividend paying companies, you have nothing but a piece of paper. The only hope you have if that company starts to decline is to find someone who will buy it from you.

A sports or blackjack or poker bet doesn’t have value beyond that game or hand. In that respect it’s just like the hundreds of millions, if not billions, of options that are traded, but never converted, on stocks, commodities and other assets around the world every day.

Hey Mr. Cuban is entitled to his opinion!

In sports betting you spread risk across many different bets. At the end of any night if you have zero left to bet the next day with it is because you didn't have a clue what you were doing to begin with . You can walk up to a blackjack table and play one hand a million dollars but that’s not what a professional is going to be doing with sports betting (or blackjack unless you are someone like Larry Flynt.

One other thing comes into play when you start tossing numbers around ... in straight gambling the ability to compound your wins is higher than it is for most participants in the stock market . Day traders can do approximately the same thing but most here know day trading isn't any easier than gambling in Vegas.

In regards to Mark Cuban's "idea" to start a hedge fund that dealt strictly with sports betting, I say the idea is on par with any other form of speculation Wall Street offers. Two things stick out in my mind on his idea. First it isn't totally original if you count the fact people have been pooling their money for years and forming syndicates to do exactly what Mr. Cuban proposed. Well run sports betting syndicates have been proven performers for quite some time in the sports betting world. Of course who cares about being original ... the idea is to make money.

Perhaps Mr. Cubans hedge structure would give it a status that would make obtaining cash easier and perhaps the legal structure could be made more advantageous to participants but the core idea of pooling large amounts of money to bet solely on games of skill in Vegas or elsewhere has already been done repeatedly for many years . There is absolutely zero to "debate" over whether or not it is possible!