Thursday, 1 January 2015

Sparky, PC, Benford And Rude Professors

I read Marky 'Sparky' Iverson's latest post with some interest yesterday. I believe Mark started a couple of years before me on Betfair, but unlike Mark, I never had the balls to throw caution to the wind and go all-in as a trader.

Although I can't say it never crossed my mind, it was never a serious option. Not only were my major sports available outside of my regular work hours, which meant there was no need to give up a decent paying career anyway, but how do you grow a career as a trader when you have no control over the source of your profits?  In a 'proper' job, income increases each year, bonuses grow, other benefits accrue and while trading from home in your underpants sounds fun, that freedom comes at a hefty price.

When you step away from a career for a few years, it's very hard to get back on the ladder, and even if you are able to do that, you are several rungs behind where your peers would be, which has far reaching ramifications for your retirement, both in terms of the age at which you can retire and benefits received when you do get there. Besides, when something is too good to be true, it's probably not going to last for ever, and for a while, Betfair was too good to be true. At one time, absolutely everyone was winning - at least if you believe what was posted on the forum.

It always seemed more likely to me that legislation would pass, putting a stop to the cash-cow of in-play trading overnight, but it was also a big risk that Betfair was, and still is, a de-facto monopoly, and that any change in their status or philosophy of 'winners welcome' would prove catastrophic.

In the event, it was the introduction of the Premium Charge that proved to be fatal. Winners still welcome, but now it'll cost you. First the 20% in September 2008, which was painful at the time, but at least manageable, but then the 40%/50%/60% reached in October 2012, which has made things very difficult indeed.

Mark appears to be at the 60% level, so I should be grateful that I am 'only' paying 50%, but whatever the percentage, it is a serious blow to motivation. As most of you know, as a part-timer, it was easy enough to step back and trade less frequently. 2014 marked saw my 10th anniversary of trading, and a hobby that was challenging and most enjoyable in the early years, as well as being hugely lucrative, is now rather humdrum as well as rather less lucrative.

One of the terms economists talk about is 'utility' and it's a fact that the more money you accrue, the less valuable each pound you win becomes. When you need to gross double what you end up with, and what you end up with is worth less than it used to be to you, it's hardly surprising that enthusiasm wanes. There is no viable option to Betfair, and none on the horizon. The golden days are over, and as Mark says, it's very much a question of grinding things out.

Mark's achievement in reaching the Super Premium Charge threshold means, as one commenter wrote:
  ...if you can get yourself to super PC it shouldn’t be too hard to rise some other career ladder
The end of the ninth full year of daily records (2006 - 2014) on Betfair makes a nice opportunity to see how the Benford numbers look. 291 days off out of those 3,287 days, (sad bastard I am), and my numbers (left) are pretty close to expectations (right):
Reading yet another Yahoo!Finance article pointing out that amateurs investing in index funds will regularly beat the ‘professional’ investor, it appears that the proof-reader was enjoying a holiday with his / her family over the festive period. The opening two sentences read:
Would it? Perhaps Daniel Solin is unaware that golf is one sport where the idea actually IS to post lower scores. The rest of the article only added weight to what regular readers will already know, which is that a strategy of tracking the indexes will see you finish ahead of a strategy where you are actively moving funds around at the whim of a ‘professional’. As Mr Solin summarises:
Here's the takeaway from this information: If you are relying on " investment professionals" who claim to have the ability to "beat the market," which includes most brokers and almost all actively managed mutual funds, you are an investing amateur.
Another article that caught my attention yesterday was this well-written piece by Daniel Mateos and posted on the Pyckio blog. It lucidly explains how value in sports betting is very much a long-term concept, and how the outcome of one event doesn’t necessarily mean anything. The failure of many to understand this was, and probably still is, apparent on forums when I’d read that a bet had won, and was therefore value, or vice-versa. The role of luck in outcomes is all too readily dismissed, at least by backers of the winner, who are usually only too happy to take full credit for the win.

As Warren Buffett wrote in his essay “The Superinvestors of Graham-and-Doddsville” when describing the one in one thousand (actually 1,024) coin-flippers calling ten consecutive tosses correctly and turning $1 into $1,000:
“Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvellous insights they bring to the field of flipping”.
About those who call another ten consecutive flips correct (and the starting point in Buffett’s essay was the then population of the USA – 225 million – so there will statistically be a few ‘achieving’ this outcome), Buffett writes:
“By then, this group will really lose their heads. They will probably write books on “How I Turned A Dollar Into A Million in Twenty Days Working Thirty Seconds a Morning”. Worse yet, they’ll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, “If it can’t be done, why are there 215 of us?” But then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same – 215 egotistical orangutans with 20 straight winning flips”.
As football (American) coaching legend Lou Holtz said - “You're never as good as everyone tells you when you win, and you're never as bad as they say when you lose.” 

Luck, both good and bad, evens out over time, in the long run in other words, which allows for the determination of value, be it positive or negative. Be lucky in 2015, and if you can't be lucky, find value. 

Happy New Year.

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