Tuesday, 25 November 2008

Value Discussion

The previous post received some really good comments (thanks MOM, Graeme Dand and JPG) that are worthy of a follow-up post.

Just to reiterate, I would say that Rule 2 may be true for pure momentum traders. I remember a few years ago when day-trading on the stock market was the big thing. A friend of mine gave up his job as a chemical engineer to day-trade. I asked him where he thought his edge was, how he would consistently be able to make money in an arena that clearly was not his area of expertise, and in which most of the traders were experts. He said he “didn’t need one”. He would just wait and see which way the market would move, jump in, wait for a tick or two of profit, and exit. He had no idea if the shares he was buying were value or not. He had no idea if the price would continue to move in the ‘right’ direction or not. He did ok for a few weeks, then found it getting harder to make money, switched to trading currencies, and was back working as a chemical engineer within three months and not being too open about how much he had lost.

Now momentum trading on sports may work some of the time, but in my experience a lot of small gains are soon wiped out by a big loss. So my trading style is to look for opportunities where my opinion differs from the market. It’s the only way to make long-term profits. If the market’s opinion and mine are the same, I have no edge. I just end up losing the commission.

I seldom bet pre-off these days. I find that the value is there when the market over or under reacts to a situation. Free tip: Watch an NFL game and see how the market reacts to a touchdown and what it does in the next couple of minutes. Every time! The market is driven by fear and greed. Value exits in sports as with companies trading on the stock market. If you make money from betting, it’s because you are finding value, even if you don’t realize it. If you are not finding value, you will lose money. As Warren Buffett said “Be fearful when others are greedy, be greedy when others are fearful”.

If you make money from betting, it’s because you are finding value, even if you don’t realize it. If you are not finding value, you will lose money. I have no qualms backing at low prices if I feel it is value. Similarly I will lay at short prices too. I know that some people say they won’t back at say 1.3 or less, but if the ‘true’ price is 1.2, why wouldn’t you?

MOM wrote: I’m sure you know that many losing punters looking for value use flawed logic betting favourites. Because favourites win about 30% of races these punters think that by backing favourites which are at better percentage odds than 30% they will show a profit. So they back favourites at better odds. All that happens is the winning strike rate of these favourites adjusts downwards so backing these favourites still loses money. But they’ve had great value so it makes it worthwhile?

Actually, unless results have changed in the last few years, studies have shown that backing the favourite DOES result in better (though still negative) returns to punters (due to the long recognised longshot bias). However, if punters are able to find great value, they will come out ahead. (Back enough 6-1 shots at 8-1 for example, and you have a winning method). So yes, I would say that great value is definitely worthwhile.

Nice to get a stimulating debate going.


Anonymous said...

Its not just the NFL where markets over/under react. Most inplay markets do this when a major incident occurs to shift the odds. Similar time frame for the adjustment to occur as well!


Cassini said...

You're preaching to the choir JPG...

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