Friday, 2 March 2018

Major Losses

A rare visit to the Betfair Forum led me to a YouTube video featuring a TEDx talk from a former problem gambler. After leaving the Army, the speaker somehow managed to lose £750,000, as well as his wife. 

One slide from the presentation looked familiar, but I can't for the life of me place why:
It wasn't the happiest of talks, (possibly the most upsetting part was that five million people buy the Daily Mail each day), although the ex-Major seems to have got his act together, at least for now, but is a good illustration of how vulnerable some people are to self-destructive behaviours.

Somewhat related was another YouTube talk I found today on the topic of Risk Intelligence, which included this slide:
The speaker, Dylan Evans, explains how for problem and leisure gamblers, betting isn't about making a profit, it's about the thrill of the win. 

For expert gamblers, there is no thrill, it's work. It's something I've written about previously - if you get excited about a big win, you should probably quit betting. 

Evans describes the motivation of the expert gambler as "the cold, rational pursuit of profit, with a certain degree of intellectual satisfaction", something else that I have long suggested, for example these words from a 2010 post on Why We Gamble:
I do find trading and investing a challenge, but an intellectual challenge rather than anything resembling a “war”.
He also talks about how expert gamblers don't see betting in terms of the maximum amount they might win but in terms of expected value, and that by thinking in this way, bets are considered with a longer time horizon.

He ends with a Damon Runyon quote: 
The race is not always to the swift, nor the battle to the strong, but that is the way to bet.  

Thursday, 1 March 2018

The Rule of 40%

There was an embarrassing error in the Wall Street Journal’s article on pundits and the strategy of the 40% probability claim. 

The full article is below, but first see if you can spot the error in this section:

Citigroup’s Mr. Suva forgot to hedge. He put a 40% chance on Apple buying Netflix, but also a 25% chance Apple buys Walt Disney Co. , a 10% chance each it buys one of three videogame makers, and a 5% chance it buys Tesla Inc. That sums to 100%, implying it is mathematically certain Apple buys one of them.
How Do Pundits Never Get It Wrong? Call a 40% Chance

Talking heads have learned that forecast covers all outcomes; ‘I just said it was a strong possibility.’

What are the chances that readers will make it to the end of this article? About 40%.

If you do make it, that prediction will look smart. If you don’t, well, we said the odds were against it.

Such is the nature of the 40% rule, a favorite forecasting tactic of Wall Street analysts and other prognosticators trying to make a bold call without being too bold.

Former British Prime Minister Tony Blair said last month there’s a 40% chance that Brexit will be reversed; Citigroup Inc. analyst Jim Suva wrote that there’s a 40% chance Apple Inc. buys Netflix Inc.; and Nomura Holdings Inc. economist Lewis Alexander said there’s a 40% chance Nafta gets ripped up.

The nice thing about 40% is that you never have to say you were wrong, says Peter Tchir, a market strategist at Academy Securities. Say you predict the Dow Jones Industrial Average has a 40% chance of hitting 30000 before year-end.

“Get it right and you can say ‘See, I was telling everyone it could happen,’ ” he says. “Get it wrong and you can weasel your way out: ‘I didn’t say it was likely, I just said it was a strong possibility.’ ”

With a 24-hour news cycle, outlets from cable channels to newspapers are always looking for an expert to weigh in. If they offer an audacious estimate that will get clicks, all the better. The trend has boosted the industry of analysts and talking heads who predict everything from election outcomes to corporate earnings.

A whiff can ding a forecaster’s reputation.

Nate Silver became America’s most famous election forecaster when he called all 50 states correctly in the 2012 presidential election. Four years later he was criticized for repeatedly projecting that Donald Trump stood no chance in the Republican primary and for his final pre-vote projection that gave Hillary Clinton a 71% chance of victory.

Mr. Silver says he deserves some criticism for his primary projections, but not his general election forecast, which he called “highly informative and useful” since others gave Mr. Trump a smaller chance.

To protect their reputations, pundits hedge. They may not provide a date by which a forecast will occur. They often “cluster” forecasts together with other analysts around a “consensus” figure so that everyone will probably be the same amount of wrong.

Citigroup’s Mr. Suva forgot to hedge. He put a 40% chance on Apple buying Netflix, but also a 25% chance Apple buys Walt Disney Co. , a 10% chance each it buys one of three videogame makers, and a 5% chance it buys Tesla Inc. That sums to 100%, implying it is mathematically certain Apple buys one of them.

A Citigroup spokeswoman said Mr. Suva doesn’t believe a deal for one of those companies is guaranteed. She said the forecast was really a conditional probability, contingent on Apple using its huge cash pile for what she called a “mega deal,” which she said Mr. Suva actually views as less likely than a large stock buyback. The conditional probability wasn’t specified in Mr. Suva’s research note.

“Pundits and gurus master the art of going out on a limb without going out on limb,” says Philip Tetlock, a professor at the University of Pennsylvania who has made a career analyzing which people forecast well, and why. One of his pet peeves is how gurus use vague terms like “distinct possibility” instead of percentage odds when they describe probabilities. That makes it easy to wiggle out of, or take credit for a forecast, since it isn’t clear at all what a distinct possibility is.

But one drawback of percentage odds, Mr. Tetlock says, is that people are often unclear on what they actually mean.

Mr. Silver can relate. Some of his harshest critics took his 71% projection of a Clinton victory as a sure thing that she would win, he says. “You wouldn’t cross the street if there was a 30% chance you’d get hit.”

Courageous contrarian calls are the best way forecasters capture the public’s attention, and get television time. New York University Professor Nouriel Roubini was dubbed “ Dr. Doom ” for correctly predicting the financial crisis. Then in 2010 he projected a 40% chance of a “double-dip recession” in the U.S. It didn’t happen.

Mr. Roubini says he doesn’t remember the projection, but that he takes pride in sticking his neck out, as with his latest call that Bitcoin is the biggest bubble in history and will go to zero.

“I would not rule out that I’ve committed the sin of the 40% rule,” said Prof. Roubini. “Everybody has done so.”

“There’s an aspect of infotainment” that Wall Street forecasters always keep in mind, says John Kilduff, portfolio manager at commodities hedge fund Again Capital. In September 2015 Mr. Kilduff told CNBC viewers that crude oil had a 40% shot at falling to $20 per barrel. Then at $45, oil followed its downward trend before bottoming at $30.

“You’re always riding the hero-shithead roller coaster,” says Mr. Kilduff, “we all have plenty of haters, and they’re even more visible now with Twitter . ” He noted one correspondent who took a forecast personally. “Hope you lose EVERYTHING [on] your short,” the person wrote in a salty email reviewed by the Journal. The correspondent also called Mr. Kilduff ugly.

“The old 40% trick!” recalled Stephen Roach, formerly Morgan Stanley’s chief economist. “A warning of a looming forecast change, a rising risk assessment, a way to cover your rear—or a combination of all three.” Mr. Roach said that by stamping a 40% probability on a possible outlier he could call clients’ attention to shifting winds without changing his underlying forecast.

A nonrigorous examination of Mr. Roach’s past forecasts showed he put a 40% chance on two recession predictions in 2002 and 2004, and then another recession projection in 2010. All of those he got wrong, or rather, got right, since he said the odds were against.

The 40% rule can be useful for all manner of punditry. British boxer Anthony Joshua speculated in 2015 that underdog Tyson Fury had a 40% shot to beat heavily favored champ Wladimir Klitschko. Mr. Fury won, and now wants to fight Mr. Joshua. A spokesman for Mr. Joshua didn’t respond when asked what chance the boxer would give himself against Mr. Fury.

By the way, if you made it this far, we always predicted you might.

There was also another nonsense click-bait headline and article from the Yahoo!Finance pages this week.
The MarketWatch headline read:

Steve Wozniak had $70,000 in bitcoin stolen after falling for a simple, yet perfect, scam

Well, not exactly. At the time the Apple co-founder tried to sell his 7 Bitcoins, they were worth about $700 each, so the writer is being somewhat disingenuous in claiming that the loss was $70,000 when it was actually less than $5,000.

Then there’s a Mashable article on the same topic with the false headline:

Even Steve Wozniak said he fell victim to a bitcoin scam
No, he didn’t fall victim to a bitcoin scam. He fell victim to an old fashioned credit card scam, and that the object stolen happened to be bitcoins is irrelevant.
As for the probability error in this post's lede, anyone who has a basic understanding about probability will know that the probabilities of independent events do not sum as the authors suggest.

Using their numbers, I make it a 31.16% chance that Apple buys none of the companies listed, not 0% as the writer suggests.

I’m not suggesting that any bet listed in the example here would be the best value ever, but should Crystal Palace be quoted at 2/1 next season to win the Premier League, 2/1 for the FA Cup and 2/1 the League Cup, the probability that they will win one of the competitions is not 100%.

Someone miserably failed Basic Probability 101.

Tuesday, 27 February 2018

The Unimaginative Fool

A year ago, I wrote about Warren Buffett's annual letter to shareholders of Berkshire Hathaway, and as tends to be the case with annual events, the 2018 edition is now available, though at 17 pages, a lot shorter than his usual missive. 

As usual, the letter is full not only of common sense, but also of amusing lines.

On acquisitions, he writes:

Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.
On the Berkshire 5K run this coming May, he writes: 
Entrants in the race will find themselves running alongside many of Berkshire’s managers, directors and associates. (Charlie and I, however, will sleep in; even with Brooks running shoes, our times would be embarrassing.) 
On retail 'savings':
Remember, the more you buy, the more you save (or so my daughter tells me when we visit the store).
As his daughter is 64, I'm not convinced this is a true story.

On dining:
Show you are a sophisticated diner by ordering the T-bone with hash browns.
On the magic of compound interest and the benefits of a buy and hold strategy, Buffett writes, after showing a chart of short-term price declines in the last 53 years:
This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions
As I mentioned last year, there are always parallels with sports investing, and that last sentence certainly applies to sports investing. 

Buffett continues:
In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow. When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:
“If you can keep your head when all about you are losing theirs
If you can wait and not be tired by waiting
If you can think – and not make thoughts your aim
If you can trust yourself when all men doubt you
Yours is the Earth and everything that’s in it.”
Other words of wisdom that stood out to me:
In the meantime, we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.
On risk:
Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained. 
On self-delusion, and also with relevance to sports investing and those promises of riches beyond your wildest dreams: 
As well-known analyst V.J. Dowling has pointed out, the loss reserves of an insurer are similar to a self-graded exam. Ignorance, wishful thinking or, occasionally, downright fraud can deliver inaccurate figures about an insurer’s financial condition for a very long time. 
Finally, most readers will be aware of the ten year $500,000 bet Warren Buffett made in 2007 that passively investing in the S&P 500 would beat any portfolio of at least five actively managed funds. As the years ticked by, the result was never in doubt, with 2008 the only year where the S&P 500 was beaten. 
The bet illuminated another important investment lesson: Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.
One very recent example is that after the markets entered correction territory a little over two weeks ago, the three main indexes I track are all back within 3.5% of their all-time highs, and in profit on the year, while the Brexit handicapped FTSE languishes a little further back, and negative in 2018, for those who didn't take my advice to follow US indices.
In more traditional financial markets, once again the main US benchmark index outperformed the UK's FTSE100. Only 4 times in the last 24 years has the FTSE prevailed, and the disaster that is Brexit means the US and Overseas markets are where most of my investments will again be in 2018.
Back to 'the bet' and Warren Buffett summarises:
Let me emphasize that there was nothing aberrational about stock-market behavior over the ten-year stretch. If a poll of investment “experts” had been asked late in 2007 for a forecast of long-term common-stock returns, their guesses would have likely averaged close to the 8.5% actually delivered by the S&P 500. Making money in that environment should have been easy. Indeed, Wall Street “helpers” earned staggering sums. While this group prospered, however, many of their investors experienced a lost decade.
Performance comes, performance goes. Fees never falter. 
In case you've missed earlier posts on the subject, of which there are several, invest in low-cost index funds and stay the course. 

Friday, 16 February 2018

NBA Systems Half-Time Report

With the NBA idle this weekend for their All-Star weekend, it's a good time to look at how the current season is playing out. 

Some of you will recall that back in September, I made a case for backing the Overs on games where the total was set at 215.5 or higher, a system I named The Beast. How many of you took action on this I don't know, but you missed out if you didn't.

I predicted a very manageable average of around two bets a day, and the 264 selections to date is very close to that number, and the results so far are very good:

The higher totals are even more profitable, for example 219.5 and higher has a similar P and L but from just 57% of the bets:
Although the BLUnders system lost money last season for the first time since 2010, I've been excluding the high total games (over 215) resulting in just 25 selections so far this season, and only one in the entire month of January, but the 9.3% ROI so far is a good reward for patience. 

Friday, 9 February 2018


Another disappointing day in the markets yesterday, as the markets move into 'correction' territory, my draw-down moves into six figures and my decision not to apply for early retirement is looking fortunate, if not prescient.   
As I said in my last post, perspective is important, and overall I'm back where I was at the end of November, which doesn't seem so bad. As Winston Churchill said:
The farther backward you can look, the farther forward you can see.
This tweet from a couple of days was rather bizarre:  
The sooner the market realises it is making a big mistake, the better! The trouble is, this is not how markets work. My Economics A Level was a few years ago now, but markets have never been so simplistic.

Before my last trip, I was looking at the EPL Draw, with games between the "Big 6" of particular interest after David Sumpter's observations that the:
"Draw in these big matches is value if greater than 3.2ish"
Previous posts have shown that using Pinnacle Sports closing prices, backing the Draw in matches featuring two Big 6 teams is profitable across the board.

Broken down by a number of parameters, here are the results for all qualifying matches, for Big 6 matches, for non-Big 6 matches, for a Big 6 team versus a non-Big-6 team, and for "Little 14" matches:
The edge for the Draw in Big 6 contests is clearly bigger than in other matches, (only one category sees the Big 6 returns beaten, albeit in a low sample size category) but there are some clear trends which apply to all matches.

It's unfortunate that there are only 30 Big 6 matches a season, but there are another 350 each year where the Draw still offers potential value.

Clearly it's not a smart strategy to blindly back the Draw in matches where just one of the teams is a Big 6 team for example, but certain matches between Little 14 teams show a positive ROI from a few hundred matches.

The premise that in matches between 'relatively' closely matched teams, the market underestimates the draw, appears to be backed by the evidence, at least in the EPL.     

There's one Big 6 match this weekend, Tottenham Hotspur v Arsenal, with Spurs currently at 1.952 with Pinnacle, and a 'true' price of 1.98 (currently 2.0 is available on the exchanges). 

Previous Big 6 matches where the win probabilities are approximately the same as this game show a profit from backing the draw of 3.84 points from seven matches:
For all matches of a similar profile, the profit is 21.31 points from 111 matches, an ROI of 19.2%.    

Wednesday, 7 February 2018

Fear Index

A little under a year ago, I wrote about the Vix trader nicknamed '50 cents' who was obsessively buying call options priced 50 cents. With barely a blip over the past year, 

the bets have been steady losers, although they were likely a hedge, but out of nowhere at the end of last week they would have been very profitable. Here's the five day chart:
After a year of trading below 20, the Vix traded at over 50 yesterday before closing at just under 30.

Who the trader worked for was revealed in May last year and this Business Insider article from last August was published after a $21 million profitable day, although not a win that made much of a dent in the estimated $150 million lost prior to that in 2017.

Personally speaking, Cassini's spreadsheet has struggled this week, with a single worst ever daily decline, a record that will hopefully last for a very long time, but with the US markets finishing strongly yesterday, I'm hoping for a big day today, although the Nikkei 225 has faded after a strong start. It always helps to maintain perspective after a market correction, and going back over the past seven years, the markets have been kind:

The biggest pull-back came in the August 2015 to February 2016 period, but after taking another six months to recover, it's been onward and upward ever since. I've talked about the benefits of buy and hold before, and an interesting tidbit on Twitter was this one from last month, which came via the excellent @bespokeinvest account: 
Traders closing out their positions every night are missing out! SPY is the exchange traded fund (ETF) designed to track the S&P 500 stock market index. It would be interesting to see the numbers for this strategy for other indexes.

Sunday, 4 February 2018

BP3 And PC3

I'm back from another (almost) two weeks of travel, which included just the one speeding ticket, and a few tweets caught my eye while I was on the road. 

One was from Betfair Pro Trader @Betfairprotrade who wrote:

Unfortunately I may be missing out on the fun, since a click on the link brings up a message that "This blog is open to invited readers only" and "It doesn't look like you have been invited to read this blog. If you think that this is a mistake, you might want to contact the blog author and request an invitation."

I'll let the reader ponder why someone might start a blog and then restrict who can read it, and point them to this post from August 2016.

If the premise of the new blog is that the writer is currently a highly paid, globe-trotting, CEO but that "in exactly x weeks from now I will resign from my job and start a new life working for myself" - well, it's déjà vu.

Also complete nonsense. No actual CEO would contemplate for a moment giving up his, by definition successful, career for full-time sports trading. If this is Big Pairs again, this is at least the third time he has tried this pitch.

In addition to Betfair Pro Trade's mention, @LESSismore44 (only the essentials) bought this blog to my attention, and after responding that it was locked, added that:
At the risk of tiring you out before the Superbowl tonight, again I'll let the reader ponder why someone might lock a blog and restrict who can read it as soon as it garners some interest? Not someone with nothing to hide would be my guess.

The Big Pairs leopard needs to change his spots next time, or at least substitute "CEO" with something more realistic - unless it stands for "Cleaning Effluent Outlets".  

There have also been a couple of Betfair Premium Charge related tweets worth looking at. 

The always interesting, and certainly dedicated, @PremiumCharged wrote that:
Betfair Premium Charge is an unfair restriction by a monopoly exchange that penalises past success from over a decade ago
Have your say @GamRegGB consultation … copy in @HbfBritain by email
PremiumCharged also responded to a posting of a video link to last November's Matchbook Traders' Conference, although in typical Webbo style, he manages to get the year wrong!
No one can ever accuse Webbo of worrying about the details. The video is here, and on the topic of the Premium Charge, as PremiumCharged suggests:
My personal take on the reactions is that I suspect Webb is genuine in this regard, and was probably over the £250,000 threshold when the Super Premium Charge was introduced. 

Peter started trading in 2000, so he had a four year head start on me, and I didn't reach the threshold until September 2012. Unfortunately, if memory serves, I was close to £200,000 at the time the limit was announced, and too far down the road to implement strategies that would reduce the impact on crossing the line. 

As Premium Charged rightly states, the:
Betfair Premium Charge is an unfair restriction by a monopoly exchange that penalises past success from over a decade ago
Worth mentioning perhaps that while £250,000 might sound a lot to someone new to Betfair, but over ten years or so, it's a rather more modest amount. If you are full-time, it's an extremely modest amount, and comes with none of the usual benefits of paid holiday, pension, National Insurance, career advancement etc., but instead comes with unsociable and often long hours, and a cut in pay when you've made a certain amount!

As someone who is not interested in tennis, I have no idea about the merits of Dan Weston's claims to pay the Premium Charge, but all the indications (body language and circumstantial) are that it's not a concern for Caan Berry. 

Fortunately for the likes of him (the Badger springs to mind) who make their money from the sales of worthless pamphlets and videos, the Betfair Premium Charges does not apply to those sales. 

The Bodger's claims to avoid the Premium Charge by defying the laws of probability and choosing where his losing bets happen, are simply neither credible nor logical. 

For the third and final time this post, I'll let the reader decide for himself why someone might make such claims.

Finally, another two winners for the EPL Draws today. Not sure what the 'official' Pinny prices will be, but Liverpool v Tottenham Hotspur was 4.0 on the exchanges, and for a Big 6 match with neither team odds-on, this was very good value as I'm sure Mr. Sumpter would agree.