Rather Optimistic Income (ROI)

Mark Iverson responded to my 'Great Work' post, I had a feeling he might, here:

Thanks for the mention Cassini - had a feeling you might respond to my post :-)

I can see your viewpoint and a normal career is one that appeals to most due to the 'safety' it provides, but after my mother died of cancer when I was 25 and after my son was diagnosed with his heart conditions it gave me a wake up call.

For me sports trading full time is a 5 year plan (4 years left) and after that who knows? If anything comes along to disrupt that in the meantime (enhanced premium charges, law changes etc) then I'm making plans as I go to provide myself with some breathing room.

Have you read the book I mention in my post, 'Rich Dad, Poor Dad'? It discusses the fear behind the 'no food on the table' outlook better than I could do justice and is well worth a look in my opinion.

I did read the book Rich Dad, Poor Dad a few years ago, although unlike Mark, and not just to be difficult, I didn’t actually think it was that good. I believe it was also reported to contain many errors and bad advice, but I did like their definition of financial independence which was that it “is when your monthly income from assets exceeds your monthly expenses” and tracking this percentage as a goal is fun and encouraging. That might not be the original source for the definition, but it’s where I first came across it, and it’s a good goal to shoot for. There are, in my opinion, better easy-to-read financial advice books out there, such as The Millionaire Next Door - want to be a millionaire? Well stop living like one!
Webbo wrote

Great post Cassini. I think the professional gambler dream appeals because people desperately want to be in control of their own destiny, doing something that they enjoy and gambling is something that anyone can try. I'm pretty sure the reality will never match the dream... well except maybe for a few intelligent bot-makers out there!

Indeed. Most pro gamblers are either in the know, or smart enough to build a bot, and thus smart enough to build a career while their bot is running!

Ben from Sports Trading Life has written a post on what returns it is realistic to expect from sports trading. The opening lines are a little worrying though, as he writes:

“So you have decided to take up Sports Trading or some form of gambling and you might have bought a few systems, looked at a few strategies or even joined a service which means you are now ready to make some money.”

I can tell you right now that if you have ‘bought a few systems’ you are unlikely to have what it takes to make money from trading because for obvious reasons, ‘systems’ do not work long-term. You will need to be a little smarter than that, if you aspire to be profitable.

While it can be confusing to talk in terms of points or units, (10 points profit a week is meaningless, since we need to know up front whether the stake is 1 point or 1000 points, and how many opportunities there are in a week), the ROI makes much more sense. If you’d stuck 1000 into a FTSE 100 index fund at the start of 2010, your ROI for that year would have been 9%. We know what that means – at the end of the year, you have 1090.

The main thrust of Ben’s post though, is that gamblers / traders really expect unrealistic returns. Ben mentions that professional gambler Patrick Veitch, who has reportedly won 10 million, has an ROI of ‘only’ 16%. I was actually initially very surprised it was that high, although on consideration, when you own horses as Mr. Veitch does, and are this privy to the inside information that goes along with this, it’s a lot more reasonable. Anyone returning 16% over the course of several years must have a huge edge.

Any positive ROI is arguably good, but there are other factors to consider. Often overlooked is opportunity cost – by investing money on sports, you are passing up the opportunity to invest in another investment. As Investopedia defines opportunity cost, it’s

“the difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).”

There’s also the cost of the time to consider, as well as the cost of subscribing to a service for the selections or perhaps for data. You might, if you are lucky, be able to make that 9% ROI on 250 bets during the course of a year, but you’ve invested a lot of time which could have been spent on other gainful pursuits. Investing 1000 at the start of the year and collecting 90 at the end is much easier, if not quite so exciting. It's also worth mentioning that ROI isn't the be all and end all of it - the number of opportunities is also a factor. A method that offers a 20% edge, but only once a year, is not so useful as a method returning 0.1%, but which offers 50 opportunities a day.

The Friendly Tipster League Table illustrates well that a double digit ROI is unlikely in the long-term, especially when you factor in that the returns do not include commission. Of the tracked selections, only one (the rather tongue-in-cheek Back The Lay The Draw Selection) has a double digit ROI, and that will soon change as it heads down with each passing selection these days.

And finally, in a book about Ancient Greece, and a chapter on Sparta, I came across a reference to the Helots, subjugated natives (essentially slaves) of the Spartans. Helots were allowed to continue their farming, but had to give 50% of the fruits of their labour to the Spartans. Ring a bell anyone? The Helots eventually revolted and allied with other Greek peoples to overthrow the Spartans.