Confident, If Not Entirely Convinced

Some changes at the top after Wednesday's results, and nice to see Mortimer and Randolph side by side! Here are the in-profit entries to date:

Scott has pointed me to an article on a 'responsible gambler' who can afford to lose £900k on the Scottish Referendum. I'm also not sure a 'responsible' person would be walking around the streets of south-west London with hundreds of thousands of pounds in their trousers, and betting it at a high street bookmaker, but maybe I'm just being difficult. There are other ways to play this bet:

A political punter stands to gain just over £1million if Scotland votes No to independence after placing a £900,000 bet at his local bookmaker, William Hill.

The middle-aged businessman, who is not Scottish, has gambled the biggest amount of money ever staked on a political event on Scotland staying in the United Kingdom.

After already placing £600,000 on the outcome of the referendum the customer has now added a further £200,000 to his wager, and stands to collect £1,093,333.33 should the outcome of the poll be a No vote.

“He placed the first part of his bet, £400,000, in June 2014, then returned to the same betting shop on two different dates in August to stake a further £200,000 each time,” said William Hill's spokesman Graham Sharpe.

“Now, today - Tuesday - he has come back in and placed an additional £100,000 on the same outcome,” said. “This adds up to the biggest bet of the century on any subject with us - and almost certainly with any bookmaker,” Mr Sharp added.

The customer took odds of 1/ 4 for the first part of his bet; 1/6 for the second part; 1/5 for the third, and now 1/5 again - meaning his actual profit would be £193,333.33.

“This man is confident, if not entirely convinced, that his gamble will pay off - in fact, he has called it an ‘investment’ said Mr Sharpe. “He isn't yet sure how or where he will discover the outcome of the Referendum.”

Mr Sharpe added: "All three bets have been placed in the same branch of William Hill in south-west London.

He said the customer was a “responsible gambler” and gave every indication he could afford to lose the money if the result did not go his way.

“He sees losing the money more as an intellectual blow than a financial blow. But he is confident and says he has done his homework.”

The latest William Hill Scottish referendum odds are 2/11 NO; 19/5 YES.

If Scotland leave, do Berwick Rangers have to join the English National League system, and if so, where do they start?

European Delay

It's quite remarkable that there are no less than four matches this week between EPL teams and Bundesliga teams. Borussia Dortmund beat Arsenal 2:0 last night, and this evening we have Chelsea v Schalke '04 and Bayern Munich v Manchester City - not sure when United play...


Tomorrow night, the Europa League sees Everton host Wolfsburg. With matches between Fiorentina and Guingamp plus Borussia Moenchengladbach and Villareal, it means that the ratings won't be updated until late Thursday or Friday morning, so for Cassini Service subscribers the newsletter will be a little later than usual.

A quick look at the big winners and losers from the midweek matches to date in the FTL. Mortimer is top dog, up 18 places into fourth on the back of a 7.56 point gain, with another 0.72 to add if Derby County can win at Blackburn Rovers tonight.

Paul Watson (-7.74) and TFA_Raz (-4.44) were the biggest losers so far this midweek. Paul's loss could be particularly catastrophic as @ValueBankFooty managed a profit (+2.77) even if his accumulator went down, and moved out of last place into an Erskine Cup spot. Paul needs a Fulham win (at Notts County) tonight and a decent return this weekend (or a dramatic loss from elsewhere of course).

A couple of entries are looking for the draw at Blackburn, and Fairfranco wants one at the Fleetwood Town v Barnsley game. Randolph wants a Fleetwood Town win, but even if they don't, it's been a good midweek for the Duke brothers currently 4th and 7th and looking at £445.

Marty left a comment asking:

A quick rules question: 25ish bets - would be feasible for 25 accas? Or should we treat as 25 selections (whether accas or singles)?

This could get tricky. With the exception of @ValueBankFooty, there has been no interest in accumulators, not even doubles or trebles, so it would be a shock to receive 25 10-folds this weekend, but then I have been shocked before. For now I'll say that one accumulator counts as one bet of the '25-ish' bets allowed.

Actually, one entry did have 30 selections this midweek, but all bets were backs and all a lot easier to manage, and in the '25-ish' range. Accas are easy to settle, in that when settling them, I simply stop at a loser.

It just occurred to me that having an "ish" rule is probably not a good idea. As I am in the competition myself, it may well be in my interest that others fare poorly, so it is clearly not good to be in a position where I can choose to accept or decline entries after matches have been played.

So the rule is that up to 25 bets is definitely acceptable, and slightly over that number is probably acceptable. The 25 rule will only be enforced if I reply to your selection email to this effect.

Thanks to Pedro who sent me a spreadsheet of team names for more than 40 leagues as used by Betexplorer and Oddsportal, and while I am not sure how much I can utilise it, the thought and effort is appreciated.

Rubicon took a break from working out how to get back into profit by sending me a link to an article about Betfair (Sportsbook) paying out early on a No vote in the Scotland Independence Referendum which of course isn't until tomorrow.

Betfair is so confident of a "No" vote in Thursday's Scottish independence referendum that it is already paying out to those who have staked money on it.

The online bookmaker says it is paying out a "six-figure sum".

Despite polls ahead of the vote continuing to be close, betting markets have been overwhelmingly in favour of the Better Together camp winning on Thursday.

Betfair said this morning that gambling patterns indicate a 79pc likelihood of a "No" vote.

Despite the odds on "Yes" shortening last week, they have lengthened significantly in the last few days.

Financial markets have appeared to mirror betting patterns in recent days, with both suggesting that the chances of a "Yes" vote are far slimmer than polls suggest.

Betfair's pay-out applies to its sportsbook operation, not the online exchange in which punters bet against each other.

Odds on a "Yes" vote have drifted from 4 (or 3/1) at the end of last week to 4.5 (or 7/2) on the exchange.

This would mean a £100 bet would return £450 if Scotland votes for independence. Backing "No" would return £127.

“Political bettors have often favoured the exchange as their choice of betting platform and it has historically provided an accurate prediction of political outcomes," said Betfair's Naomi Totten.

"Paying out early on our Sportsbook is testament to the esteem in which we hold the illustrious track record of our Exchange.

A six figure sum. A cheap publicity stunt, and the price of a No victory is even shorter as I write this, in the 1.23 / 1.24 range. The media loves to make out such contests are close (think US Presidential Elections) but they are usually anything but, and money talks. The exchange has indeed "historically provided an accurate prediction of political outcomes", and the results of quality opinion polls shouldn't be ignored.

On this subject (quality polling, not Scotland), 538 published this article which I found interesting.

I was troubled by a survey released Monday by Mitchell Research in Michigan. It wasn’t that the results — which showed Democratic Rep. Gary Peters leading Republican Terri Lynn Land by 2 percentage points in the U.S. Senate race and Republican Gov. Rick Snyder leading Democrat Mark Schauer by 5 points in the governor’s race — were necessarily wrong. It was how Mitchell said it arrived at them that bothered me.

From the Mitchell release:

Mitchell Research had intended to release a survey today that we conducted on Wednesday, Sept. 10th, prior to President Obama’s speech to the nation regarding the conflict in the Mid-East. That poll showed Snyder leading by only 1 point, and Peters up by 8 points. However, because of changing poll data nationally, we decided to conduct a survey last night (September 14) to see if those events coupled with the increased television advertising by Snyder and Land might have changed the races in Michigan.

Here’s one way to read this: Mitchell Research conducted a poll, thought the results looked wrong and decided to conduct another survey to get results it thought made more sense.

That would be fine if Mitchell released the full data from the first poll. But it didn’t.

A pollster should release its work regardless of whether it thinks the results are right. Outliers happen even to the best pollsters. They are supposed to happen.

And, of course, a pollster has no way of knowing whether a result is an outlier.

Sometimes when a poll appears to be an outlier, it’s the first survey to pick up real movement in a race. And sometimes when a poll fits neatly into previous surveys, all the surveys end up being wrong.

Squashing results, however, suggests a pollster is looking at other pollsters’ work (beyond its weighting mechanism) to determine whether data is worthy of publication. Such decisions can lead us down a bad path.

When a pollster holds back some data, we can’t be sure what other results it might be holding back or changing. What might have happened if Mitchell Research’s second poll didn’t seem to match what it thought it should be? Would it have conducted a third poll?

What happens when there are other results Mitchell Research doesn’t like?

And though it’s beside the point, I should note that Mitchell’s explanation for the change in results has no backing from the majority of other polls. President Obama’s approval rating is the same as it was a week ago, according to the aggregate of polling information. There hasn’t been a big swing to Republicans in the majority of other Senate races. The FiveThirtyEight estimate actually gives Democrats a better shot at holding on to the Senate than they had a week ago.

But not releasing all results that were meant for public consumption is sketchy, even if it’s thought that those results might be wrong.

As readers of the Cassini Newsletter will know, my numbers are often quite out of line with the market, which could mean great value has been identified, or more likely that I am missing something. It is with some hesitation that I mention some of these, because no one wants to look stupid, but I often do.

For example, last week, I suggested that Reims at 2.97 appeared to be value versus Toulouse, with the market at 2.45, and also Bordeaux at Guingamp (3.17 / 2.45). In Germany I had Paderborn at 2.21 v Koln, with Pinnacle offering 3.21 on them.

The results? Reims won 2:0, Bordeaux lost 1:2, and Paderborn drew 0:0. On this subject, one member asked me why I don't include higher priced selections in my Cassini Value Selections. The answer is that my concern with odds being much over the 10% threshold, it's usually because I am missing something, and the prices on offer are literally too good to be true. At higher odds, i.e. lower probability of winning, a small error can mean a supposed edge is triggered more easily, and confidence in long-shots is weaker. It's something to keep an eye on though, because the pricing model (aka Excel spreadsheet) 'should' improve as more results are entered in, and longer prices may become more appealing.

If I calculate the true probability of an event as 0.125 the market need only have it at 0.114 for it to be 10% value. At evens, my estimate of a 0.5 probability only has a 10% edge if the market's is at 0.445.

Finally, and its not quite the same thing, but I'm sure most of you have noticed how certain people are very quick to announce their results after a good weekend, and yet go very quiet when it is the reverse. I suppose some people are stupid, and don't see through this, but I personally find it annoying.

Total Biff

Thirty of the thirty-three entries have now seen action, and the table is starting to take shape (see previous post). The holdouts are Skeeve, (who is planning on a second-half of the season campaign), OverGoalify (who has made a few selections, but none yet in the leagues covered) and TFA's Euro Draws, which will likely have selections at some point in the not too distant future.

One observation is that the net total is in profit, as are 18 of the 30 who have made selections to date. It suggests that the standard of competition this season is much higher than before! 20.90 points from 844 settled bets, an ROI of 2.47%. When you consider that with a little effort, most of the prices recorded against can be beaten, that's a decent return.

The table is really in thirds - three of them strangely enough. The top third are the in profit my more than a point, the bottom third who are losing by more than a point, and the middle third comprised of three anal-retentive holdouts plus those who haven't strayed far from zero yet.

BettingTools.co.uk (-1.72) and Fulltimebettingblog (-0.33) both made small losses but continue to lead the way with Fairfranco (+5.99) storming into third place.

Bundeslayga (+2.53) marched steadily into fourth place ahead of Draw Picks (-3.12) in fifth.

Randolph (+2.28) moves up to sixth, Drawmaster (+0.47) dropped one place to seventh, a whole 0.01 point ahead of XX Draws (+4.98) in eighth. It's been a good season so far for draws apparently.

Sjosta (+5.22) made a big move up to ninth from negative territory, Gecko made 4.17 with his debut selections and is tenth, Mountain Mouse made another 1.84, Jamie A lost 2.70 points (I think – I usually mess up his numbers somewhere, and he always points out where).

Daily 25 made 1.49 with his first selection, bettering the Football Investor (Bounty entry) who made 0.49 with his opening shots, and Ian Erskine who made 0.46 points with his.

Club Havana was up 1.85, TFA_Raz lost 2.08 and XX Unders was up 0.84 to make up the top eighteen profitable entries. Club Havana and XX Unders both emerged out of the red this weekend.

The dirty dozen currently letting the side down by being negative at this stage are led by Mortimer who made 1.38 points which, I would just like to point out, was an average gain of 0.017 points per bet! 

"Mortimer," Randolph says, "We're back in business!"

Next is Football Elite (Bounty, idle) and The Football Analyst’s Draw (Bounty) entry which lost 1.00 point on their debut. Cassini Value made 0.98 points, Trend to end made 0.41 points, Betcast was idle and Rubicon made 1.76.

Online Trader was up 0.45, Abromo down 1.10 and Talkies Tips lost 0.69. Paul Watson lost 2.87 while @ValueBankFooty was idle.

The 81 selections took a few minutes, and while it wasn’t hugely onerous, it’s not something I want to repeat in a hurry. Thanks for the emails and comments of support, including one from the guilty party, but it is not his fault for taking advantage of an apparent loophole, rather mine for not limiting entries before. 

Jamie A, quite correctly, pointed out:

I did try to warn you about the lay prices!

I'm happy with people making as many selections as they like as surely the more instances of perceived value you have the higher the likelihood that your perception of value is wrong.

But then again i'm not doing the admin.

If I had a method that picked that many selections which were value I wouldn't be part of the FTL at all as I would spend all my time calculating trying to get bets on & applying the same method to as many leagues as possible.

I do think you should make it so that everybody has to submit their bets in a specified format (using football-data team names for example) so the admin is kept to a minimum.

Indeed Jamie did warn me. Note to self: Stop messing up his numbers, and listen to what he has to say.

Jason suggests an award would be appropriate:

The admin sounds like a nightmare. I run a horse racing tipster competition at High Class Equine, both paid and free entry, in a winner-takes-all prize and small win if a free entrant wins. Luckily we have just a small group of about 15 tipsters and one selection each Saturday, so manageable.However, it can be time consuming and if by chance a number of new entrants arrived I would quickly shut the door.

There are only so many hours in a day.

I can imagine the look on your face when 94 entries arrived.

You deserve a medal.

I certainly won't be adding to the 33 entries already in! And then Lazy trader had this to say:

You need to automate things especially if you use things like Football data's csv files for results etc. Shouldn't be the hardest thing in the world to set up a webpage that'd gather all matches etc

I used to use football data's files to do everything from the upcoming matches and results/odds.

Where/what do you currently use for the matches/results/odds at the moment I'll see if I can tweak my code to cobble something together.

I'll take a rain check on that kind offer for now. I think with the limit of around 25 maximum per entry it should be quite manageable, but if the FTL idea were to get any bigger, some automated / standardised format would be a must.

We move on.

An administrative detail is that following next weekend, I will make the group assignments made for the Erskine Cup. I am aware that the following midweek sees a number of the top leagues in action, but I want to give myself time to publish the Groups and opening matchups (to be played on the weekend of 27th) and also time to update my Elo ratings and send out selections for subscribers. Last week was a good one in every category, and I don't want to be a total biff just as we are getting hot.

Here is how Group A would be comprised were the allocation to be made today:

The four players will pair-off on the three dates shown, as indicated by the colours (blue plays blue) and the better entry will get 3 points. 1 point each if there’s a tie, and the tie-breaker after three matches will be the actual point profit.

The end of September marks the first of the ‘monthly’ (August/September) prizes worth £25 courtesy of Betcast. David runs bettingwebsites.org and has a number of trading Betcast Podcasts. I erroneously told you previously that David was from Australia. He must have gone up at the end of his sentence, because he is actually UK based. I’m not sure there are too many worse insults in life than being called Australian, so I am very, very sorry David …. (like that Steve M? Right back at ya')

While I rather missed @ValueBankFooty’s acca selection this weekend, so did Marc, writing:

Valuebank footy is a total biff, as he forgot to email for the second week running - This week costing me a 10.6pt profit. That said, what goes around comes around as last week would have seen a 7.35pt loss, so not all bad but selective memory in forgetting last week and remembering this would have been a nice break - Reminders set everywhere now - and I am looking forward to a midweek thrash out and landing a nice little acca.

I actually had no idea what a "total biff" was, but I have learned something new. Not often that happens these days. 

There are a number of selections already in for the midweek matches, including this five Home Team accumulator from Banky: 

SWINDON - READING - NOTTINGHAM FOREST - YORK - BURY. 

Before risking everything, bear in mind that @ValueBankFooty is currently 1.06 points adrift of Erskine Cup qualification in 33rd place, which simply means that he's due...

And I'm sorry Betcast, but Champions League games are not part of the FTL due to the absence of any official recorded prices. Football Data do not cover these matches. For anyone interested, David was looking for an away win for Atlético Madrid (@ Olympiakos).

FTL Table 15.Sep.14

Value Galore

With one exception, the number of selections, per entry, per round, is somewhere around 6.5. While I was hoping that most entrants would be cognizant of the fact that administering each selection takes time, and voluntarily restrict their entries to a few where they had identified value, I received 94 entries from one person for this weekend (81 in one entry, 13 in the other).

Not only is this a huge number, but many of the selections were Lays at higher (odds-against) prices, i.e. matches with a high win probability, which means a large number of bets where I have to enter the price into my spreadsheet and note the profit. Not a big deal for the odd one or two lays, but it gets old fast ploughing through 40 plus.

This is a huge amount of work of course, and with 35 FTL entries I clearly can’t commit to this effort every week. Even at an average of 10 minutes per entry per week, that’s close to six hours in total. This is something I do in my spare time, but I do have a full-time job and would like to keep my wife, so six hours is already at the top end.

Since it's my own fault for not having specified an upper limit, I'll deal with it this time, but as self-appointed commissioner of the FTL league, I am going to have to exercise my executive commissioner powers and limit the number of selections per entry per round of matches.

I’ll say 25 for now, but this is negotiable to a point. Some people's selections, my own XX Draws for example, are variable in number, and it could happen that one week they have no selections, other weeks they have 30 (highly unlikely, but possible), so if the number exceeds 25 but is usually below that, I’ll make exceptions. And I did email the person in question, and he is quite understanding of this change. I'm just glad to have got away with just 94 - in his reply, he mentioned:

I actually removed about the same about as I sent you because the edge was too small

Good heavens - there's a lot of value floating around this weekend! The other point that this strategy has raised is that the formula for adjusting prices to accommodate lay bets isn't sufficient in some markets. The rather naïve assumption on my part was that lays would be mostly at odds-on and shorter odds-against, but the fixed formula needs to be changed so that higher lays (2.5+) are being made into a market that mirrors that for back bets.

The screenshot below shows an example over-round of 1.03 (which was the average for Pinnacle in the Conference last season, with a range of 1.018 to 1.038):

Under the previous formula a Pinnacle back price of 3.2 was adjusted to 3.25 and a winning lay made 0.44 points profit. The new formula adjusts that 3.2 to 3.395 and makes the potential profit 0.42 points. It's a change that should only make a small difference, but if there are markets with larger over-rounds, the current formula leaves a loophole that could be exploited.  

Again, I'll stick with the current formula for this week, but the new formula will be effective after the weekend.

As for this weekend, we have a few debutants in action. Ian Erskine (of Erskine Cup fame, but also known for his FTS Income service), has ten selections, Daily 25 has one, Football Investor has seven, and Gecko has five. I already mentioned that TFA has his first (draw) selection this weekend. Football Eite is idle this week, as is @ValueBankFooty - I was looking forward to another accumulator. 

Here are the Wisdom of the Crowd numbers, representing where entrants see value:

A lot of support for the Arsenal v Manchester City draw, and no love for West Bromwich Albion or Manchester United (nothing new there). Only one clear home selection (Crystal Palace, and I have them as 7.2% value (currently 2.24 versus my 2.09). 

Pinnacle's Nadir

I can’t say it was huge surprise that Curacao based Pinnacle Sports have followed SBOBet and withdrawn from the UK market, but it is disappointing news. I saw TFA ask Pinnacle Sports on Wednesday for comments on the rumours, and their reply was hardly unequivocal.

Pinnacle Sports’ business model of using punters to highlight inefficiencies and help them to sharpen their lines has certainly been a welcome breath of fresh air in the past few years. If only the more traditional books would learn from Pinnacle and re-invent themselves, but it's so much easier to close and limit, yet so short sighted.

Pinnacle's understanding of geography might not be as sharp as their mathematical skills - 

and their continued reference to FC Nantes as Nantes Atlantique (despite the Atlantique being dropped more than seven years ago) was almost as annoying as their low draw prices in Ligue 1, but overall they will be missed, especially if you like Aways and Draws. 

TFA Graeme wrote a long piece (when does he ever not?) about this in his email to subscribers, and mentioned a few options for accessing the likes of Pinnacle Sports and SBOBET, notable the use of bet brokers or using an account registered overseas, such as the ROI (Republic of Ireland). For the top leagues, liquidity on the exchanges makes these a viable option if you are not paying the Premium Charge, and the low ROI (Return on Investment) on football bets makes it a useful way of generating commission and delaying the onset of Premium Charges.

As for the FTL, nothing changes. Joseph Buchdahl of Football Data has confirmed that he will still be collecting Pinnacle’s prices even if he appears to be unable to mention their name:

Speaking of Graeme, I mentioned yesterday that he had opened his FTL account with two draw selections both ending 1:0, but that was my mistake. I am not familiar with Graeme's numerous systems, and when he said his draws would be D1-D6 and I saw selections in D1, I got rather excited.

Turns out that D1 is not automatically in D1-D6 but that D1-D6 is its own entity. I think I've got it now, and Graeme's slate has been wiped clean. He is definitely in action this weekend though, and I hope no one in profit went out and spent the £25 bounty. Daily 25 is also making his debut, and Football Investor may be in-play. 

A Rising Tide

With a round of Conference games this midweek, a few tipsters were in action, with varying degrees of success. BettingTools.co.uk extended his lead at the top, and his share of the prize money while Club Havana and Mortimer trimmed their deficits. TFA_Raz trimmed his profits slightly, which was not the intention I'm sure, and TFA Draws made its much anticipated debut, but both selections finished as 1:0 results.

For the eagle eyed among you, some of the selection totals are higher than the results because some entries for this coming weekend have already been entered. I'm expecting the weekend to get a little busier. 

One of the less positive aspects of a zero-sum competition like the FTL is that everyone has a vested interest in the success or failure of others, especially if they are a Bounty Entry, but overall, the returns to date overall are good. The net total is -3.08 from 547 bets, and if a certain south London team hadn't snatched a 95th minute equaliser at Newcastle United a couple of weeks ago, @ValueBankFooty's accumulator win would have seen that total be positive. 

I really am trying to wind down the index funds discussion, because as with climate change, its deniers are an ever shrinking minority in the face of overwhelming evidence, however Emp was back with some fine quotes.

Frankly, I couldn't care less about the mythical average guy who has no information, and apparently no time to search for it either

I keep forgetting that Emp is so much better than average. I'm not sure who has no information in this information age, but it certainly doesn't take much time to search for investment advice. Go to Google and type in "Green All Over"...

What you may be missing, is that by definition, the average guy can never do well. There just isn't room in the markets for any but a tiny minority to profit.

Yes, you see this in the harbour when the tide comes in. Those multi-mullion pound yachts just float so much higher than the average ones. Investors in the S&P 500 last year had a torrid time, only making 32%. My heart goes out to the huge minority who did so poorly.

Seriously, I think Emp confuses traders with long-term investors. Not many of the latter have failed to do well over the years. It's exactly the trading (active management) strategy that costs profits and that I am advocating be avoided. Pay attention Prabs!

If hypothetically, everyone jumped into index funds as you advised, the stocks in said index would necessarily become over-valued (because people buy them just because they are in the index).

 "Said index"? Yes, there is only one index in the world markets, and everyone is piling in to it. The stocks in "said index" are indeed becoming over-valued. Perhaps Emp missed the part about diversification?

Plenty of people can and have predicted and benefited colossally from market turns.

And plenty of people have predicted the second coming and the end of the world. If you have a steady stream of experts predicting an upturn or a downturn, of course someone will appear to have made a great prediction after the fact, but it's the way of the world that all the other incorrect predictions they have made are overlooked, and that too much weight is given to a lucky guess:

“The data is clear, 50% unemployment, a 90% stock market drop, and 100% annual inflation . . starting in 2012.”

That catastrophic outlook comes from Robert Wiedemer, economist and author of The New York Times best-seller Aftershock. Before you dismiss Wiedemer’s claims, consider this: In 2006 he accurately predicted the collapse of the U.S. housing market, equity markets, and consumer spending that almost sank the United States.

Oops. Consider this: Someone missed out on some massive returns last year.

Of course there will be a crash, and of course there will be a recovery - at some time - (it's how economies work) but anyone who claims to be able to accurately predict them (date and duration) is either wealthy beyond imagination (The Sultan?) or dishonest, delusional or both (The Sultan!).

Dilbert And Embedded Bullshitness

As much as I’m sure Matthew wouldn’t like to be lumped in with Emp, the two did again both have comments on my last post.

Matthew's is worth a read, and is in full below, discussing the vast array of funds and investment choices we are faced with, and this important point caught my eye:

As you rightly say there is not just one index but if an investor currently holds a FTSE All Share tracker and a Russell 2000 small cap tracker and he is currently beating the performance of the actively managed funds benchmarked against the performance of the same indices he should not necessarily sit back and think that he has maximised the return on his capital.

It reminded me of the early success of the XX Draws. It was only when the overall number of drawn matches declined precipitously last season that I was forced to look at the underlying numbers and ultimately take consolation from the fact that, although down on the season, the results were still better than a vanilla benchmark of draws. Simply winning or making profits isn't the be all and end all of betting or investing as Matthew correctly points out. There's often room for improvement and in betting, markets can change in a hurry.

Here is Matthew's comment in full:

Grazie Saggio Cassini,

Once again you provide a thorough and enjoyable analysis. Looking at it again I am rather comparing apples with oranges. I think my main intent was to compare different methods of allocating savings for the retail investor for long term prosperity. When you are making decisions regarding your pension, stocks and shares NISA or SIPP you are often faced with a bewildering array of funds and of every conceivable strategy. Income funds are invariably included in your pension prospectus and yet the description seems incongruous with the concept of allocating money with which you are unable to touch till you retire.

Ultimately we want to make the most money possible and if it comes from a DRIP income fund or from a passive managed index tracker is of little consequence. I am a huge fan of the low cost index trackers but simply question whether sometimes an attempt to separate the best of breed from a large index via yield evaluation might beat the returns of the tracker for the self same index. Obviously it would have to beat the additional management fees to make the exercise worthwhile.

So can a DRIP income style fund outperform an index tracker fund from an ROC perspective over the longterm? They are both called upon to perform the same role if you agree with the fund prospectus from your pension, NISA or SIPP IFA advisor. As you rightly say there is not just one index but if an investor currently holds a FTSE All Share tracker and a Russell 2000 small cap tracker and he is currently beating the performance of the actively managed funds benchmarked against the performance of the same indices he should not necessarily sit back and think that he has maximised the return on his capital.

Those who have purchased your draw selections and Graeme's TFA selections are investing in football bets but generated from different strategies. Much as they would love to simply compare your selections to other draw backing strategies and Graeme's 7-22 to other H/A backing strategies I am sure they are looking at the ROC of both and wondering which deserves the finite capital more. Of course there could just be a desire for diversification.

I feel I have rather gone off track now. As for re-allocation if one was to try and execute an income style fund strategy oneself there are of course timing issues regarding the buying and selling stock but they are certainly navigable by the retail investor. Finally a note on my education and knowledge as a financial trader. My education simply taught me to always read more, any institution that gets this message across has in my view done well by its students and it does not matter what name is on the building. As for my knowledge on financial trading I am sure I can find the back of a small envelope to put down all I know to pass on to you.

Somehow I suspect the envelope will be on the large side, stuffed with reams of A4 paper, all covered with Matthew's knowledge.

I think the assumption that we are all trying to maximize our returns should perhaps be challenged. Plenty of people, including the two people living in the house where I was born many moons ago, have quite happily gone through life happy to ‘invest’ (I use the term loosely) in bank deposit and building society accounts. I’ve mentioned before that my maternal grandfather was a stockbroker, which makes my parents’ aversion to the stock market (“too risky”) all the harder to understand, but my Mum thinks being a day late returning a library book is living on the edge. While the high interest rates of previous years (15% my Mum mentioned just a couple of days ago, as she bemoaned the meagre returns of today) has seen their savings over 50 years increase hugely, (the power of compound interest) they seem blissfully unaware, or at least don’t care, that had they invested more wisely, they might now be as comfortable as the Sultan. Their low risk tolerance meant that the higher returns associated with the volatility of the stock market were not worth the stress to them. I try not to dwell too much their poor decisions over the years have cost to me in my forthcoming inheritance.

In general, as retirement nears, one should move out of stocks into less volatile investment, but my parents being totally out of stocks for their entire lives (save for a few gifts from the likes of the Halifax and Woolwich) is taking this to an extreme. Maximising returns usually takes second place to protecting capital at some point in our lives, but not usually from the day we’re born.

Another point is that we can all get a little too hung up on stressing over maximizing our returns. Perfect is the enemy of good, and there is much to be said for keeping life simple.

And now to Emp, and it may well be a ‘lost-in-translation’ thing, and given that just one person seems to be missing the point, it probably is, but one of the key things Emp / Prabhat is missing is what we mean by the “man-in-the-street” or Mr Average in the context of this debate.

It may sound harsh, but the average person is not a sophisticated investor, he has little understanding of investment choices, and he simply doesn’t have the tools to identify the 1% of active managers who ‘might’ beat the market. He wants to save money for his future.

For this person, the advice to investing consistently in a diverse portfolio of low cost index tracking stocks is an excellent long-term strategy.

Emp waffles on about how theoretically it is possible to find an edge, and given time and a certain knowledge set that might well be true, but this is completely irrelevant for the vast majority of people.

Emp also feels that for some (he doesn’t explain why) reason actively managed funds might outperform index funds in a bear market. Some might, some might not, but again, he is off topic. We are not debating the merits of one versus the other in a short-term bull or bear market, but over the long-term. Next, Emp will be telling us he can predict market turns. Oh wait, here he is now:

“Embedded bullishness doesn’t do so grandly in a bear-market, and there’s certainly one coming in the next year or two”.

You read it here first. Certainly? Well, no, not certainly. Quite possibly, but no one can successfully consistently predict market turns, except possibly Emp. “Next year or two” is a bit vague really. It almost sounds like he’s guessing. Come on Emp – surely you can share the market peak date with us. We’re like family. I think perhaps he meant to write "embedded bullshitness".

Although this is an interesting topic, and one that I shall likely remind readers of again in the not so distant future because it is important, especially for you younger readers, I’ve spent more than enough time for now on this.

I’ll leave you with the thoughts of Dilbert creator Scott Adams on the topic:

It's a Perfect Strategy for My Enemies

I can think of many cases in which I would recommend active money managers over index funds. For example, I might be giving the advice to someone I hate or—and this happens a lot—someone I expect to hate later. I would also recommend active money managers if I were accepting bribes to do so, if I were an active money manager myself, or if it were April Fools' Day. And let's also consider the possibility that I might be drunk, stupid or forced to say things at gunpoint. I've also heard good things about a German emotion called schadenfreude, so that could be a factor too.

Multiple Indexes

The always charming and eloquent Matthew had a comment on the Passive Index v Active Managed stocks debate:

Dear Padrino,

I have been enjoying the dialogue between yourself and your avid blog readers regarding the prudence of index tracker investing. You will find one particularly vociferous group who will disagree with you regarding the peerless nature of this type of investing. The group being comprised of course by the acolytes of Neil Woodford. These bastions of middle England will take great pleasure in telling you how Mr Woodford's Invesco Perpetual Income fund under his tenure outperformed the FTSE All Share handsomely for 20 years.

This leads me to the question of how do you feel about the practice of dividend hunting portfolios with say a once a year reallocation and automatic dividend reinvestment? Is a diverse, high yield portfolio of large caps strictly managed able to squeeze more juice from the index tracking approach? Both methods will of course be often investing in similar companies effectively but with an added filter. This is something the amateur, thanks to discount brokers, can indulge in himself and costs are very manageable if you balance infrequently. These portfolios often contain the same faces year after year so balancing is not too arduous.

I look forward to hearing your thoughts on the matter.

Based on his impressive education and a career background in financial trading, I suspect that Matthew knows far more than I do about these things, so my thoughts and opinions are very much from the man-in-the-street who accepts that others on the inside of the financial world will always know far more than he does about these things, and whose philosophy is thus to keep it simple - invest frequently and consistently in a number of diverse index funds, keeping costs to a minimum.

For those who have not read every single Green All Over post, and shame on you if you haven’t for it is an illuminating read, one of my best financial decisions was to start trading futures and options. It opened up a whole new world of investment possibilities, and I learned a great deal about trading and entry points and lot sizes and the like, but sadly it turned out that others in the world knew more about the price of pork bellies and orange juice than did I, which led to another excellent financial decision, which was to stop trading futures and options.

I dabbled a little in day-trading stocks part-time in the early 2000s but was always aware that however timely my information was, it wasn’t timely enough, and that professionals whose waking hours were spent studying, analysing and dissecting markets, sectors and individual companies would always know far more than me, and rather like trying to trade in court-sider infested markets today, if I can buy or sell at a certain price, it is because the insiders / experts are offering that price to me, and they are not offering me that price out of generosity to me.

In simple terms, stock mutual funds are typically for growth, for income, or a blend of the two. Growth mutual funds tend to focus on capital appreciation, i.e they buy stock in a company with the expectancy that the stock price will increase, while value or income based funds tend to invest in companies that pay dividends. Comparing an Income fund with an all-share index is not comparing like with like. The relevant comparison would be to compare Inveso Perpetual Income Fund with a benchmark for Income Funds.

The major indexes are based on the top companies listed in the relevant country’s stock exchange, for example the FTSE 100 is comprised of the 100 companies listed on the London Stock Exchange with the highest market capitalisation.

Similarly, the DJIA (Dow Jones Industrial Average) is made up of 30 companies, and the industrial is a relic from a bygone age, but the S&P 500 (made up of 500 leading companies trading on the US exchanges) is a better representation of the U.S. stock market, and for the US economy.

The question Matthew asks confuses me slightly, since there isn’t just one ("the") index to beat. Each mutual fund is of a certain type, and each have their own indexes against which they are compared.

Growth funds are measured against an index for growth funds, and an income fund against an income index, and again I would say that the man in the street is unlikely in the long-term, to consistently beat the appropriate index. The "dividend hunting portfolio" should be measured against a similar benchmark.

How one should allocate investment funds is dependent upon factors such as ones age and risk tolerance of course, but it’s not meaningful to compare an income portfolio approach with anything but an income index.

And for the record, I am a big fan of DRIPs (Dividend Re-Investment Plans). They are generally a low cost (commission free) way of buying more stock.

As for annual rebalancing / reallocating, this seems perfectly sensible, although I question the wisdom of rebalancing at the end of the calendar year when everyone else is doing the same. It seems to me that if you are tracking an index, and are light in one company for example, then others will be too, and if everyone goes chasing at the same time, the price you pay will be more than had you re-allocated earlier in the year. There’s a similar issue when a major Index drops a company and replaces it with another. Most Indexes make changes frequently; in June this year the FTSE 100 added 3i Group and dropped Melrose Industries and Intu Properties replaced (coincidentally, given the nature of this blog) our dear old friend William Hill.

Prabhat doesn't know when he's beaten, and returned to comment:

I'm slightly puzzled, my comment explicitly stated that the average person (or fund) won't 'beat the market'. My point was that a) if someone wished to be excellent it's possible.

Yes Prabhat, I have conceded that it is possible (to beat the market long-term), but it's highly unlikely and you have not offered any reason why my assertion, backed by mounting evidence, is not true. Not wishing to believe it isn't evidence. There's also the question of, not only transaction costs, but the cost of the time your cunning plan to beat the odds is going to take. One imagines that would be quite significant.

Emp continues:

You keep saying the average person has no self control etc., and here we are on common ground. I agree entirely that the average person lacks discipline, self-control and other attributes necessary to succeed. My point was if someone has those attributes or wishes to cultivate them, they have options better than an index fund. For that matter, judging by track records you yourself (not to imply you are average) would have done better investing in your football selections than the market.

What options are better than an index fund? That is the crux of the debate, which is not about comparing one investment type with another, (another day perhaps) but about having decided to invest in stocks, what is the best way to invest in them.

Marty chipped in:

When asked I always advise people to invest in low cost index funds and to drip feed investment, so I generally agree with Cassini's practice.

I disagree with this though:

"The S&P 500 last year (2013) was up 32.42% ... ask your friends from outside the financial world... not many would be close to that."

If they're holding US blue chips (a very common investment approach) then lots of them will likely have beaten the S&P, because they're holding the stocks the S&P is made up of and a fair proportion of stocks in that index will have outperformed the index.

The S&P 500 is actually considered a blue chip index, as is the DJIA, so it all depends on how blue you want your chips. The broader index actually beat the narrower one anyway, although neither matched the technology heavy Nasdaq Composite which gained more than 38% in 2013. The Nasdaq is made up of 3,000 components, which suggests that sticking to blue chips rather than a broader basket was a better bet. The Russell 3000 was up 31%.

"The Dow industrials DJIA, -0.15% rose 72.37 points, or 0.4%, to end at 16,576.66, its 52nd record close of the year. The blue chips ended 2013 with an annual rise of 26.5%, the largest since 1995."

With 2014 2/3rds done, the S&P 500 is up a "mere" 8.4%, and I'm glad I looked at the Yahoo Finance page for that tidbit, because what do I find but yet another excellent and well-researched article that is most timely (you may feel that you have heard some of the common objections before):

I'm not going to make you wait for the punch line. Your single biggest investment mistake is owning any actively managed funds. That's where the fund manager, through stock picking and market timing, attempts to beat the returns of a designated benchmark, like the Standard & Poor's 500 index.

I started writing books and blogs about investing in 2006. At that time, only a very small minority of people invested in index funds. Jim Cramer was at the height of his popularity.

I struggled with different ways to communicate to investors that the only intelligent and responsible way to invest was to capture the returns of the global market. This meant investors should avoid stock picking, reject market timing and not engage in the fruitless attempt to pick the next "hot" mutual fund manager. The general reception to this message was about the same as you would expect watching a vegetarian lecture to a cattlemen's convention. The common objections were:

-- "I don't want to settle for 'average' returns."
-- "My broker and I can 'beat the market.'"
-- "I only invest in companies I know."
-- "I can beat the market using dividend-paying stocks."
-- "If you are right, that means everyone making predictions in the financial media is wrong."

Though these assertions may have surface appeal, none of them withstand scrutiny, despite the messages pushed by the mutual fund industry and much of the financial media. The passage of time has been accompanied by a seismic shift in investor attitudes. The dismal track record of actively managed funds has caused even leading proponents of active management to throw in the towel.

Morningstar describes itself as a leading provider of independent investment research. One of its best-known products is its star rating system, which rates mutual funds from one to five stars, based on how well they performed (after adjusting for risk and accounting for all sales charges in comparison with similar funds).

Although Morningstar has cautioned investors to make expense ratios (the management fees charged by mutual funds) a "primary test in fund selection," many investors ignore this advice and use star ratings instead. The mutual fund industry encourages this practice by touting the star ratings of its best-performing funds.

Given Morningstar's pre-eminent position as a provider of information about actively managed funds, it was startling to read the views of John Rekenthaler, the company's vice president of research. In his blog post, Rekenthaler reviewed net sales over the past 12 months for all exchange-traded funds, passive mutual funds and active mutual funds. He found 68 percent of those sales went to passive investment products. Rekenthaler concluded that passive investing is now the mainstream approach and that "active managers have become the periphery."

The message that actively managed funds typically do not add value to investors is resonating globally. A report issued by the Pensions Institute in June 2014, "New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods," based at the Cass Business School of City University in London, reached some startling conclusions.

Researchers examined the returns of 516 stock funds based in the United Kingdom for the period from 1998 through 2008. They found only 1 percent of fund managers produced returns sufficient to cover trading and operating expenses.

In my prior experience, even this data may not dissuade many investors. They would tell me that, with the assistance of their broker, they had the ability to select and purchase that tiny percentage of outperforming actively managed funds. The report by the Pensions Institute dealt a death blow to this claim.

First, it found that prospectively identifying the minuscule number of outperforming fund managers is "incredibly hard."

Second, the report noted it takes 22 years of performance data to have a high degree of confidence that a fund manager's out-performance is a product of skill rather than luck.

Third, it found the tiny group of "star" fund managers able to generate superior performance in excess of operating and trading costs were the sole beneficiaries of their skill. They extracted "the whole of this superior performance for themselves via their fees, leaving nothing for investors."

Perhaps the cruelest cut was that researchers concluded the vast majority of under-performing fund managers were "genuinely unskilled," not simply unlucky. Here's the good news. It's disarmingly simple to avoid making this critical investment mistake. The first step is replacing your actively managed funds with low management fee, comparable stock and bond index funds, passively managed funds or ETFs.

Note that the article references the Cass Business School of City University, London, and not the Prab Business School, which may be a stock-picker sponsored private organisation who are no doubt busy working on a rebuttal article to the growing body of evidence that, while it's nice to think you're above average, the chances are you're not, unless you're the Sultan. I suspect the finished, peer-reviewed, article will be a long time coming. Another comment may not be quite so long in the making, but I hope it has a little more substance that just saying "in theory, I can beat the casino" and then offering no evidence for how this dream might realistically be realised.

FTL Update 8.Sep.2014

With fewer entries than usual due to the top leagues being on an International break, no Monday matches selected, and only four downloads from Football Data required to bring you the numbers, here they are a little earlier than usual:

TFA_Raz and Mountain Mouse made their debuts winning ones with triple digit ROIs, and it was a good weekend for Fairfranco and Drawmaster who both added to their profits. 

Although Graeme (TFA) was idle from an FTL perspective, this was the first live weekend for his service. His Bounty entry for the FTL is a Draws system, which this week had no selections, and perhaps for good reason. Draws were few and far between this weekend. League 1 had one draw from seven matches, League 2 had four from eleven (one match to come) including a rare 4:4 and the Conference Premier had none from the full twelve matches. Peter Nordsted's Drawmaster found two from three, which was impressive, Online Trader found one from five, and Paul Watson found one from one, also impressive. 

We are still awaiting the first entries from eight people, and a reminder that the 'draw' / allocation of places for the Erskine Cup competition will be made after the weekend of September 20th. While doing a quick 'what if the allocation was today' practice run, I did see that TFA would currently have two entries in the same group, so if necessary I shall adjust the allocation to ensure that no group contains more than one entry from the same person. But there are still a couple of weeks to go, and it may not be necessary. 

Empirical Evidence Required

As I had a feeling he might, Prabhat / Emp had a comment on my post about index funds and the improbability of the man in the street beating them over the long-term, and I do agree with him on one thing, although I didn't mean what he infers:

Before I say anything else, I am offended by being classed with 'Sultan'. I am not seeking anyone to 'invest' in me or to fund my activities or buy advice or any such thing, I'm not selling anything and am not self-promoting with an agenda.

What I actually wrote was meant to distinguish two types who could ignore the advice - wealthier clients (e.g The Sultan) and experts (e.g Emp):

Wealthier clients such as the Sultan, and those like Emp for whom beating the market is so easy, it's amazing that not everyone is above average, can obviously ignore academic research and this advice, but for mere mortals like most of us, it’s pretty solid.

It was certainly not my intention to lump Emp, or anyone else for that matter, in with the Sultan. That would have been very rude. And I don't mean to suggest that Emp / Prabhat is not wealthy by the way. He may well be, but obviously not in the same league as the Sultan.

Emp's comment has been published, but as usual, he fails to give any reasons or evidence why he feels that Mr. Average should ignore the advice of academic research and try to beat the market. Yes, it is always possible, and being optimistic is a good thing, but optimism has to be tempered by reality, especially when it comes to investing for your future. How can Mr Man-in-the-Street realistically expect to beat the insiders of the financial institutions?

Finally, I am not making any advice as to what anyone should do with their money; just pointing out the fact that you won't become truly rich doing what everyone else is, so if that is one's goal than they had better try and be smarter than everyone else.

I'm not sure what he definition of 'truly rich' is here (the Sultan can probably help), but the point is that 'everyone else' isn't investing in index funds. More people are investing in index funds now than have done in the past, but as anyone trading sports knows, discipline is key, and the man in the street tends not to be too disciplined and reacts poorly. I know plenty of people personally who are not making optimal decisions for various reasons.

"Average returns" sounds a little wishy-washy, but the term means market average returns, not that returns are average amongst individuals. I'm sure that anyone who has invested as suggested in my post for a few years is unlikely to run into anyone who has made more than them, save the individual who is over-invested in his own company which has been on a tear, or someone who got lucky.

The S&P 500 index is a broad (500 stocks as its name implies) index, and last year (2013) was up 32.42%. It's probably not recommended to ask your friends from outside the financial world what returns they achieved last year, but were you to do this, and were you to get an honest answer, not many would be close to that.

Prabs concludes with:

Also, while we are on the point, I have to note that all these guys who are saying 'you can't beat the market' of course have their own 'low cost index funds' that they want you to invest in...what do you think they are going to say, when their business depends on fund collection from the masses in a major bull market?

Not true, and a strange thing to say. "All these guys"? Academic research comes from academic institutions, not from Vanguard. These studies are reported on by writers, not by financial institutions. Vanguard and other Index Fund offering institutions might like what is being written, but that in no way invalidates the findings.

As I said earlier, if Prabhat can offer any reason why he thinks the average returns can consistently be beaten by the man in the street, I'd love to read it.  Saying that "in theory" long-term averages  can be beaten is just repeating what we all know.

In theory, climate change may not be the result of human activity.

In theory, Deepak Chopra makes perfect sense.

What we are missing here is some supporting evidence for this "theory" of Emp's, and on that, I expect to hear nothing.