Choice or Necessity

I’m not sure Laurence Stanley (@LaurenceStanley - author of "Make Money Betting on Sports") is trying to suggest that Warren Buffett, the third richest man in the world, according to Forbes, with a net worth of $60.8 billion, and someone renting a house in Essex have much in common, but he comments on my Mistakes Were Made post:

"Those are facts. Circumstantial evidence leads a rational person to question why such a high earning individual would live so shabbily relative to their claimed income, and question whether his living arrangements mesh with the claim that he's in the market for a new car."

From Warren Buffet's Wiki:

"In 1957, Buffett operated three partnerships. He purchased a five-bedroom stucco house in Omaha, where he still lives, for $31,500.

I would suggest that there’s a world of difference between living a certain lifestyle by choice or out of necessity.

Many extremely wealthy people live far beneath their means. As Warren Buffett put it in the Becoming Warren Buffett documentary I recommended a few weeks back, money is just a way of keeping score. 

"In a sense, the game that I'm in gets more interesting all the time. It's a competitive game, it's a big game, and I enjoy the game a lot"

While Warren Buffett is famous for living in the same home he bought back in 1957, he does actually have another house, although he is currently in the process of selling it for a mere $11 million.

Berkshire Hathaway CEO Warren Buffet has put his six-bedroom house in Laguna Beach’s Emerald Bay on the market for $11 million.

“For the first time in nearly 50 years the legendary ‘Oracle of Omaha’s’ home (at) 27 Emerald Bay is now available!” says the listing by Bill Dolby of Villa Real Estate.

Buffett, 86, has owned the ocean-view home since 1971, when he paid $150,000 for it. He’s used the house for family vacations for the past 46 years, Dolby said.

Built in 1936, the 3,588 square foot home in the guard-gated community has been renovated over the years. Most rooms have views of the surf and rocks, and five bedrooms have en suite bathrooms.

Admittedly this second home isn't mentioned too often, presumably so as not to spoil the narrative of living in the same house exclusively for 60 years, but Warren Buffet did also sell another vacation home he owned in Laguna Beach, California in 2005 for close to $6 million.

As for Warren Buffett’s lifestyle, this Investopedia article explains it:

Buffett is also happy with what he has in terms of his modest standard of living. He isn't interested in a bigger house, a newer car or owning his own island. He simply doesn't care about the Joneses and what they have.

Why not a mansion? - he was asked.

“How would I improve my life by having 10 houses around the globe? If I wanted to become a superintendent of housing … I could have as a profession, but I don’t want to manage 10 houses and I don’t want somebody else doing it for me and I don’t know why the hell I’d be happier.“

This house does just fine, he says. “I’m warm in the winter, I’m cool in the summer, it’s convenient for me,” he said in the interview. “I couldn’t imagine having a better house.”

In February, Buffett shared further non-materialistic sentiments with Charlie Rose. “I have every possession I want. I have a lot of friends who have a lot more possessions. But in some cases, I feel the possessions possess them, rather than the other way around.”

Another example is the founder of Walmart (Sam Walton) was famous for driving around Bentonville in Northwest Arkansas in an old pick-up truck and living his life just like everyone else in town. 

At the time of his death in 1992, he had a net worth of $8.6 billion. This Washington Post article from a few years before his death details his lifestyle and his attitude to being the wealthiest man in America.

Warren Buffett is an extreme example of the philosophy of living within your means, and no rational person knowing anything about him would question his net worth based on the fact that he hasn’t moved from his roots, and lives in a home that is perfectly suited for him.

Other billionaires are a little flashier with their lifestyles, Oracle’s Larry Ellison likes his planes and his racing yachts for example, but the book “The Millionaire Next Door” is essentially about how a person’s wealth is often not revealed by outward appearances.

Most millionaires do not live ‘millionaire lifestyles’. They live within (often well within) their means, frugally but not miserly, and don’t care about buying a flashy new car every year or living in the most expensive house they can afford.

I would however imagine that for most people, on attaining a certain level of wealth, a priority would be to invest in a home. It’s one of the best investments most people can make, and you have to live somewhere!

"The Millionaire Next Door" talks about UAWs (Under Accumulators of Wealth) and those who are PAWs (Prodigious Accumulator of Wealth).

On car shopping habits, the book concludes that:

…a common UAW drives a current model car, purchased new, and may have financed it on credit. PAWs rarely purchase new model cars and are less likely to own foreign or luxury vehicles. An example from the book details a UAW that spent roughly 60 hours researching, negotiating and purchasing a new car. In the end, while the car was purchased "near dealer cost," in the long run the UAW's time and money could have been more efficiently spent creating wealth rather than collecting possessions notorious for depreciating in value. The authors contrast the story with a PAW who decided that the pride of owning a brand new car wasn't worth the $20,000 price difference.

The book also talks about ‘million dollar choices’:

Some of the financial choices that UAWs make are considered to be “million dollar choices” because if the choice hadn’t been made, the UAW would have in excess of a million dollars. One example of a million dollar choice is to smoke. Smokers and drinkers tend to be UAWs because instead of building net worth, they spend their income to purchase alcohol or cigarettes.

I can’t say I’m averse to the occasional pint or two as a social activity, but smoking is a ridiculous activity on many levels.

I’m not talking about any one individual here, but for many people coming from backgrounds where they are not used to having money, the arrival of sudden relative riches can be hard to handle. There’s a reason why many lottery or pools winners or sports stars end up broke.

Life, if you’re lucky, is a long journey, and those wins or relatively few years of high income while you are at the top of your sporting career, have to last a long time. Invest, and let compounding be your friend. Spending on luxuries at the expense of your future is very short-sighted.

When I had my recent meeting to discuss preparedness for retirement, the advisor made it clear that there are two sides to the equation – your savings and future income are one side, but are meaningless without knowing your expenses on the other side.

Back to the topic of Laurence’s comment, and the question a discerning mind should be asking is does someone rent a house from choice or out of necessity? Does Warren Buffet continue to live in his home of 40 years from choice or out of necessity? I don't think any reasonable person would draw the conclusion that Warren Buffett lives there for any reason other than that is where he wants to live.

It’s also worth pointing out that the net worth of Warren Buffet is well established, although it probably fluctuates by the odd billion or two as the market moves. The accounts of his holdings are audited and can be relied upon.

This is not always the case, which is why we often have to rely on circumstantial evidence. Blog posts are the claim, not the evidence, and all I’m suggesting is that before giving anyone your money, perform your due diligence. Does the available evidence support the claim?

When it comes to selling religion / mediums / fortune telling or making easy money schemes, people tend to believe what they want to believe.

This blog simply encourages its readers to think critically before acting.

On religion, Carl Sagan said that "Extraordinary claims require extraordinary evidence". 

The standard of evidence required to back claims of trading success may not be at quite the standard required to prove a deity, but some ordinary evidence would be good.  

Pension Builder

One of the Horse Racing blogs on my blog roll is that of Wayward Lad, and his hit rate appears to be phenomenal:

A slip of the keyboard though, as the blog actually started in March of 2010, not 2017.

Another blog by the same author is Pension Builder, which started back in 2013 and has the summary description of:

Having given up on the professionals, this is my own actively managed UK private pension (SIPP). I have a target for annual growth of 15% which - should I achieve it - will give me a Pension fund value of over £500,000 when I reach my 65th birthday on 8th November 2024.

In his opening post, Wayward Lad wrote:

Why am I writing this blog?

For over 3 years I have written a horse racing blog 

When writing that blog, I quickly realised that by putting my thought down on paper (ie, the blog) that my focus became more rational and I was less likely to make reckless wagers. I became a better judge of risk and reward, which meant that my profits went up from my gambling investments. I am hoping that the same will happen with my stock-picking for my pension.

I'm also hoping that readers of the blog will contribute their own ideas and information with regards stock-picking and pension planning and that everyone will benefit.

Wayward Lad doesn't post on Pension Builder too often, 35 posts since its inception, but I agree that the act of putting thoughts down on "paper" greatly helps you to focus. 

In addition to finding writing relaxing, I get far too much pleasure than is healthy from updating my spreadsheets. In addition to all the sports sheets related to ratings and betting, I keep records which are purely about the sports themselves, just because it interests me. 

Then there's the "NetWorth" spreadsheet where I track everything related to my (our) finances. (Actually it's 'my' because as I've written before, financial matters are best left to the man of the house). Ask me what I spent on breakfasts in 2014, or what our (my) rental income was that year, and it's all there. 

While at university, my son wrote a thesis about the maxim that  'what gets measured, gets done'. The quote appears to have been attributed to several people over the years, and there's no doubt that it's true. If you track, record, and make realistic projections, goals will be met. Aside from regulatory obligations, there are good reasons why companies track every detail and set targets. Metrics matter.   

It's always worth remembering that some things are beyond our control, for example you can control your spending, but you can't control the economy. 

I'm of a similar age to Wayward Lad, (i.e. we are both in our prime...) and have been tracking my investment numbers for a while, but from a retirement perspective only since 2010. It's a very helpful exercise, not only keeping you disciplined, but also in coping with bad spells as they come along, as they always will. I only wish spreadsheets had been around when I was starting out in life.

Wayward Lad mentions a goal for annual growth of 15% which seems a little ambitious, although I don't believe he's including contributions in that figure, even if they will become less significant as the pot grows of course.

Over the last 20 years, the FTSE 100 has averaged exactly 4.0%, and over the last 10 years just 2.5%. The 15% figure hasn't been exceeded since 2009, but Wayward Lad has around 15 individual holdings rather than index tracking funds, so the benchmark might be beaten by some distance!

I've added Pension Builder to my blog roll so that it's easy to keep up to date with Wayward Lad's progress.     

Slicer's Secret Bet

Is Slicer's 'Secret' Bet a secret these days? 

Slicer came to prominence around 2010, and I've written about this subject before, my conclusion being that there was no such thing as a combination of bets that would guarantee a profit, as was claimed.

One (of course) Anonymous commenter had written about Slicer's system that:

No doubt you're clever enough to figure it out yourself but there is a mathematical edge in those games and it's not that hard to exploit.

Presumably Anonymous has long since retired with his millions and a Fields Medal while I continue slowly, but inexorably, towards mine, unfortunately not smart enough to figure out such a mathematical edge.

In the above-referenced post, I wrote:

As someone on the forum commented, you can be pretty sure that anyone who claims an edge, and is happy to talk about it, is one of three things:

1. Very, very stupid - so unlikely to be in this position

2. A charlatan - looking to profit from the gullibility of others

3. A smart individual who is attempting to manipulate the market to their advantage

I would add:

4. A sufferer of an attention seeking disorder 

Undeterred by logic or common sense, work groups were formed around the globe, forums dedicated to the project sprang to life, and several thousands of hours were spent chasing the elusive third (if necessary) bet that was needed to secure guaranteed profits every time.

Except that it never existed as there was always a small chance of the strategy failing, as revealed by the suggestion that for the third bet, you:

Try to find CS that have little chance of happening and at the same time as low odds as possible.

What could possibly go wrong? 

I came across this manual and its companion spreadsheet during Operation Retirement, where one of my old files was a PDF - "The SS BET brought to you by TheProjectForumTeam" with the details. 

That I have no idea how I came about this, and had completely forgotten about it tells you all you need to know about it's worth, but I'm sure I didn't pay anything for it.

And apparently, I am one of just 200 people in the world to know the secret! 

Refund Policy: This product is limited to a short number of people and in order to keep the information which is available throughout this manual as secret as possible, our refund policy has to be strict. Therefore we do NOT accept any requests for refunds.

Exclusivity: This manual will only be available to 200 people in the world.

I suspect it is known to a few more than that these days, as I found this article on it on the SportsTradingLife website: 

He claimed the method was completely risk free but what he failed to mention was that it wasn’t actually risk free.

Apparently, the Slicer’s bet involved…

Laying Half Time 0-0

Backing Full Time 0-0

Then if 0-0 at half time you would have to lay an unlikely correct score at incredibly high odds.

So for example, you could lay 0-3 to the underdog @ 70 in order to lock in your “risk free” profit.

Along with the small problem that it is not a risk-free system and that "unlikely" doesn't mean "impossible" is the time you need to spend.

You have to monitor the game until either a goal is scored or Half-Time and be available to place the high-risk / low reward 'adjustment bet'. 

Good luck if you decide to try this at home. 

Opportunity Cost

Opportunity cost has been covered in this blog before, here for example, but here is another article on the topic from February 2016 by Kim Iskyan, on the Stansberry Churchouse site. I'm not sure it needed the stock example in so much detail to illustrate the point, but maybe the writer had to hit 500 words to get paid (I make it 509):

WHY YOU NEED TO ACT WHEN AN INVESTMENT ISN'T WORKING OUT

In economics, “opportunity cost” is the value you give up by making a choice. The real cost of a choice is not just the time and money you spend on it; it is the value of the alternative. Investors face opportunity cost in every investment decision.

Let’s say that on November 1, 2014, you bought $10,000 worth of Baidu (ticker BIDU on NASDAQ), the Chinese web services company. Earnings were surging, the company’s growth outlook was exceptional, and analysts were pounding the table to buy.

You did some research and bought at $242 per share. But things didn’t go well and sixteen months later, Baidu traded at $145 per share, a loss of 35 percent.

Another stock caught your eye that fateful day. It was Nippon Telegraph (NTT on the New York Stock Exchange), the Japanese telecom company. You could have bought it at $31 a share. The stock, and market, seemed boring, and a major analyst had just downgraded NTT. So you passed.

Sixteen months later, NTT was at $45 per share, for a gain of 42 percent (not including dividend payments of nearly 3 percent).

Your $10,000 Baidu investment is now worth $6,500. Had you invested in NTT, the same $10,000 would be worth nearly $15,200.

Your unfortunate decision to buy Baidu shares resulted in a $3,500 loss. Add that to the $5,200 you did not receive by investing in NTT, and you have an opportunity cost of $8,700.

Of course, you had no way of predicting the two stocks would perform so differently. However, as the chart below shows, an investor would have had many opportunities to sell Baidu shares and buy NTT shares.

If the investor admitted that he had chosen the wrong stock and swapped the “dead money” in Baidu to buy NTT stock, he would have had a lower opportunity cost.

Cutting losses is one of the most difficult decisions an investor has to make. 

As we’ve said previously, the sunk cost trap is a pitfall where an investor judges an investment based on the time and money already “sunk” into it. It’s hard to admit failure, so you keep soldiering on, hoping things will get better, despite evidence to the contrary.

Seasoned investors always look at each portfolio holding and ask: “If I didn’t already own it, would I buy it today?” If the answer is “yes,” then holding a stock that’s lost value may be warranted. If the answer is “no,” it makes sense to sell and move on.

It’s important to establish rules before buying shares to avoid the pitfalls of emotional investing. In particular, a trailing stop is an easy, effective way to limit your losses.

At the same time you buy a stock, enter a trailing stop order that will fill when the share price falls by say, 25 percent. No hand-wringing or anguishing over what to do – you’re out automatically.

As an investor, it may be painful to take a loss, but doing so may allow you to find a better opportunity and reduce your opportunity costs.

In case you're interested, in the 15 months since the article was published, Baidu has recovered somewhat to $177, while Nippon Telegraph is back to $43. 

Whether "cutting your losses" means closing out a trade for a loss, or accepting that the time spent on sports investing would be better spent building a career or with your family (divorce and child support are expensive) isn't the point. The point is that it's not an easy thing to do, but there is likely a cost to the activity, even if you are lucky enough to be profitable.   

Future Savvy

Tony Stephens had a fairly long comment, actually more of a question, mostly on the theme of ‘blip or trend’:

Sad to see people walk away from sports betting/trading (whatever you want to call it) but if something stops being fun or too costly then you must ask the question of why you want to continue.

It would be interesting (for me) to get a bit more understanding around what we should consider to be good or bad trends if such a thing exists. Trends exist all the time possibly over various dimensions/overlays of time periods.

In say greyhound racing we see the sp fav opened up as fav at 2.0 and SP'd at 1.5 with a straight line inbetween. The trend there was very much a downward trend and you would pat yourself on the back (or some other form of celebration that takes your fancy) if you got on near the 2.0 or even 1.75. Now, if we then looked at the trend of all the dogs that opened up in the market as a fav over the past year we might determine that 75% of them actually tended to drift more than they shortened up. So a trend that occurred within the 1 race for maybe thousands of seconds looked like a good trend initially but in fact may be more likely to be a bad trend to follow race to race.

So can a good trend be identified within an individual race / match / day or should a good trend generally always be over a much longer period? Does this make sense?

Just a quick comment first on his opening paragraph before addressing the main point.

I think statsbet’s decision to walk away from sports betting/trading is actually laudable and quite the opposite of sad. Spending 40 hours or so a week away from home working is bad enough, but if you are bringing in a salary or wage, i.e. providing for your family, and investing in your and their future, it's a necessary evil and most of us who are employable and want to better ourselves do it without too much complaint. 

However, spending your additional leisure time in the evenings or weekends and probably slowly giving some of that income back is not. If you have small children, as statsbet does, that time is irreplaceable.

What is sad is the amount of time and money that most gamblers waste pursuing unrealistic dreams. This pastime seems to attract more than its fair share of young and undereducated individuals, looking for a short-cut to success. Some have children that they no longer see on a daily basis. To me, that's what is sad. 

Betting / trading is for most of us, a hobby, and hopefully one that doesn't prove too expensive, either in financial terms or in time, which is arguably more important. Unfortunately it is not a victimless hobby as Joseph Buchdahl eloquently puts it:

Science is teaching us that the uncertainty of rewards, rather than the rewards themselves, is what drives a curious mind. Gambling presents itself as a kind of elixir of knowledge; ultimately it disappoints but has us coming back for more. This is the addictive power of maybe.

Credit to statsbet for understanding the realities of it all and where his priorities need to be, and a thank you to him for sending my hit count through the roof this month. The unrealistic dream of a 1,000 hit daily average might actually be possible. After four days of May:

Now to Tony's question about trends. In the context I use the term, a trend cannot be identified within an individual event, but over a period of time or number of events. 

It's important to understand that a trend is something that is usually long term in nature, for example there's a trend for people to marry later in life, or to have fewer children. You wouldn't identify a trend based on one month or one year of data, but after several years.

In a sporting context, a trend might be that there are more or fewer goals being scored on average. 

It is not a trend if Crewe Alexandra have scored one goal in each of their past three games, or Swindon Town scored early against a northern team starting with the letter B on a Tuesday night in the past two Novembers. That's noise. You can find patterns everywhere if you look hard enough.

However, what we're really interested in is finding a weakness in the market that we can profit from. 

The term “blip or trend” can be seen everywhere, e.g. in economics, property, currency, stocks, bonds, etc. here and for anyone who is interested in the topic, there’s an excellent book called Future Savvy: Identifying Trends to Make Better Decisions, Manage Uncertainty, and Profit From Change by Adam Gordon which defines a trend as:

…a sequential pattern of change in record data – a change evidenced by a rise or fall of variables when measured between two points over time. To be commonly considered a trend, rather than a fad or a blip, a pattern in the data must pass basic tests of significance.

Now the problem with sports markets is that they change, sometimes literally overnight. Even the most casual of users on the exchanges will tell you that, for example, horse racing markets are not the same today as they were five years ago, maybe not even one year ago.

They have evolved, track-siders may have moved in while Premium Charge payers have moved out for example, and will continue to evolve, so there is little to be gained from looking at markets from too far back.

You’ll read about people who claim to have huge databases with tens of thousands of records going back to the dawn of, if not time itself, the exchanges, and how certain patterns can be seen, but looking at markets from way back is of little relevance to today. It might impress someone unfamiliar with data processing, but once the parameters of a market change, old data is worthless. Garbage in, garbage out, I seem to remember from my programming days.

So the quote from Adam Gordon “when measured between two points over time” has to be modified for sports to ensure that the two points are comparable. Looking at football as an example, looking at matches in the two points for a win era, or prior to the change in the offside law, has no value.

Football is a good sport to look as an example in this debate. I’ve previously revealed that blindly backing Away teams in League Two has been profitable in recent seasons. 

Not only is there a trend showing that Away teams are winning more games (from 2000-2011 the average was 28.3%; for the six subsequent seasons, it was above 30% every time, with an average to date of 32.3%) but more importantly, the Away price is currently under-priced. It's useless hitting at 50% if the price on winners averages 2.0 or less.  

The data doesn’t lie, but the nature of sports betting means that by the time any statistical “basic tests of significance” have been passed, it’ll be too late. The edge will be gone.

Incidentally, while it would be unrealistic to expect to be able to always match the Maximum Odds, note the difference to your returns that a little shopping around can potentially make. Pinnacle may be the best in the business for most of us - generally competitive prices and a business model that doesn't close accounts - but they are not always the best on price.

Betting on League Two has a couple of advantages – markets are liquid, prices are widely available, and the standard of players is still high, but the amount of interest in the league is much less than that for the top European Leagues. The markets are less efficient.

If you go too far down the football pyramid, you run into problems not only of liquidity, but also the problem where the VORP (Value Over Replacement Player) of certain key players becomes critical. 

For an example of this, just follow Skeeve and his detailed analyses of games at the National League level (one down from League Two for any non-UK readers, the league where pro meets semi-pro).

At this level, you need to emulate Skeeve, and since not many of us have either the time or inclination to spend hours reading injury reports and tracking suspensions, back-four combinations, weather conditions etc., you’re better off just signing up to his service and watching the money roll in. And before anyone asks, no I am not in any way connected to Skeeve.

Back to trends, and if you can explain why your trend might be occurring, the trend driver, you will be more confident in its veracity. A drop in weight can be positive (you’re watching your diet and exercising regularly) or negative (you’ve got cancer) – having an explanation for your results is always a good thing.

I should also mention that a trend needn't necessarily be on the results side of the equation, but can be on the supply (price) side if they change as a result of different expectations from the market.  

In other words, the strike rate is important, but equally important are the prices available. It's as useful to us if there is an increase in Away wins while prices stay the same, as if the Away wins remain constant, but the market adjusts its prices in our favour. 

Football is a little different from many sports though, and changes more rapidly. Many sports are run with teams as franchises with no promotion or relegation, but in the Football League for example, every season sees a turnover of at least 25% of the teams. This is a significant disruption each year, bringing with it new managers, new ideas, new players and new venues.

This is good though - with change and disruption comes opportunity.

And things don’t stay constant within a season in football either. Aside from injuries, transfer windows and suspensions which affect the playing side of things, there were no less than 18 managerial changes for the 2015-16 League Two teams, either prior to the season or during it. Four were pre-season, seven were before the end of 2015, and seven more were before the end of season.

This was quite an increase from the eight changes during the 2013-14 season and consequently very disruptive.

I’m not claiming this as a reason for the Away bet showing value over the past five seasons, just giving an example of the thought process behind trying to determine a trend-driver.

League Two is also the most competitive division of the Football League. Over the last five completed seasons, the average point differential between 1st and last (24th) is 50. 

In League One, this number rises to 55.8 and in the Championship to 56.2. This difference will increase again after this season with League Two currently at 50, League One at 63 and The Championship at 70, with one round remaining.

As for when to start acting on what appears to be a trend, I take the approach of starting slowly and allocating a certain amount to the project. One losing round of results isn’t important, perhaps even one month of losses isn’t, but in the same way that you use trailing stops in the financial markets, there’s a line that once crossed says enough is enough.

Ideally once your profits start to build, you can increase your stakes, but adjust the line at which you are going to pull the plug as you go. All trends will end, and it would be folly to build up 100 points of profit over a couple of years, and then see it all disappear. How much you take off the table is a personal choice, but waiting for the trend to return can be lengthy and costly.

In the long run, we are all dead – John Maynard Keynes

Anyone verifying my numbers, all calculations are courtesy of Joseph Buchdahl's excellent Football Data web site, may have noticed that the system has slumped since the turn of the year, -13.87 points in 2017 using Pinnacle's Closing Odds, and up a slender 1.85 points at best odds. 

I’ll be updating the final numbers for the League Two Away system after the final round this weekend, and it'll be an interesting one. 

In my youth, Hartlepools United became Hartlepool AFC before the United was restored, although not the 's'. I rather like curiosities like that. The story of how Queen's Park Rangers lost their apostrophe is interesting too, but that can wait for another day. 

Hartlepool, whatever their name at the time, seemed to always be seeking re-election back then, and every time (a record 14) they were successful. 1924, 1929, 1939, 1960, 1961, 1962, 1963, 1964, 1970, 1971, 1977, 1978, 1983, and 1984. Phew! 

Their luck may have finally run out. If Newport County win, the Poolies are down. If Newport slip up, a win for Hartlepool United over already promoted Doncaster Rovers would save them. Doncaster might be less than fully committed in front of a packed Victoria Park if news filters through that Plymouth Argyle are winning at Grimsby Town and the title is out of reach, but it doesn't look good for Hartlepool to continue their Football League career.

Sleep Well Before Investing

Via Scientific American, I came across this old (2011) article by Katherine Harmon highlighting the importance of not trading or gambling while tired. 

We all know the importance of staying hydrated of course, but here's more evidence on the importance of sleep before making investment decisions: 

SHORT ON SLEEP, THE BRAIN OPTIMISTICALLY FAVORS LONG ODDS

Sleep deprivation can lead to plenty of unwise decisions, which researchers have long tied to flagging attention and short-term memory. But a new study shows how just one night of missed sleep can make people more likely to chase big gains while risking even larger losses—independent of their tapering attention spans.

A team of Duke University researchers examined the brains of 29 healthy volunteers using functional MRI, which tracks changes in blood flow in the brain, while the subjects performed a variety of gambling tasks.

After a full night of sleep, participants behaved like most people tend to in the real world: guarding against financial loses and cautiously pursuing gains.

But when deprived of a night's sleep (kept awake in the lab from 6 p.m. until 6 a.m.), the volunteers "moved from defending against losses to seeking increased gains," the researchers reported. This shift "suggests an unfounded rise in expectation for gain," a condition the team describes as "an optimism bias."

As expected, subjects' attention levels dropped throughout the night they were kept awake. But this decline was not tied to the shift in gambling behavior, suggesting deeper changes in the brain that might be affecting a person's attitude toward risk and value.

Upon examining the fMRIs, the researchers noticed that when making financial decisions in the gambling games, sleep-deprived individuals had greater activation in the ventromedial prefrontal cortex, an area of the brain associated with fear, risk and decision-making, compared with when they were well rested. The sleep-deprived group also showed a drop in activity in the anterior insula, a region implicated in emotion and addiction, relative to when they had slept.

These changes might be linked to the excess dopamine the sleep-deprived brain tends to fire off in an effort to help keep alert. This neurotransmitter, which is linked to pleasure and reward, might be at least partly to blame for sleep-deprived subjects' increasing sense that they have better odds of winning big—and their lessening fear of losing.

The findings suggest that an all-night stint at the blackjack table or logged into an online poker game can be an extra gamble. These sleep-deprived players "are facing more than just the unfavorable odds," Vinod Venkatraman, a graduate researcher in Duke's psychology and neuroscience departments and a co-author of the new study, said in a prepared statement. "They are fighting a sleep-deprived brain's tendency to implicitly seek gains while discounting the impact of potential losses."

These effects could also extend to areas where the stakes are even higher, such as the trading floor or the hospital, where workers often perform their duties when they are less than well rested. "I think it's critical that society as a whole grapple with the data generated about the detrimental effects of sleep deprivation," Michael Chee, a professor at Duke's Neurobehavioral Disorders Program in Singapore and a co-author of the new study, said in the statement.

And because these effects seem to run deeper than just apparent torpor, a shot of espresso—or even stronger stimulants—might not short-circuit the sleep-deprived brain's tendency toward unwarranted optimism, Venkatraman added. "Countermeasures that combat fatigue and improve alertness may be inadequate for overcoming these decision biases," he said.

Loss Aversion

With retirement getting ever closer, I've started clearing things up at work, including going through personal (electronic) files, to make sure they don't contain anything I can't live without. Several of these are drafts of blog posts, some which were polished and published, and others that appear to have been missed for one reason or another. 

As most of my posts are not time sensitive, you may see a few of these appearing over the next few days.

This one was an actually a two-part article written for, and published on, the Betting Expert site on the subject of Loss Aversion.

Loss Aversion – Part One

Numerous studies have shown that the pain of losing something is felt more strongly than the joy of gaining something. In economics, this is known as loss aversion, and some studies suggest that losses are twice as powerful, psychologically, as gains.
The evidence suggests that this trait is deeply rooted in the human psyche, and reveals itself in the world of sports in perhaps surprising ways. For anyone who trades sports, understanding the nature of loss aversion can be beneficial in two ways. Firstly, if you are aware of it and understand it, then you are better placed to avoid the consequences of it, and secondly, if you are aware of how it can affect the emotions of the players involved in the sport you are trading, then you might gain a valuable edge there too!

Putting The Evidence Together

A detailed study carried out by two professors from Wharton College in the USA, Devin Pope and Maurice Schweitzer, looked at golf, specifically the PGA Tour, and compared the results of putts for birdie, for par, and for bogey.

In most PGA Tour events, the number that matters is the total after 72 holes. A birdie can be viewed as a point gained, while missing a par putt can be viewed as a point lost. The results showed that, after accounting for other factors, the results of a putt for birdie and a putt for par revealed loss aversion.

Putts for birdies were missed more often than putts, from the exact same spot, for par. In psychological terms, it was if in the first instance, (the birdie putt) the player considers his position a win, and plays conservatively to ensure it doesn’t turn into a loss, while in the second instance (the putt for par), the player plays more aggressively.

Although not making either putt means the player is a shot worse off, losing a point is viewed as more serious than not winning a point. Further evidence that loss aversion is in play here is found when the result of the putt is looked at. More birdie putts came up short, than par putts – the player was ensuring that the par was going to be made rather than play aggressively and risk missing the hole and leaving a more challenging par putt.

Loss Aversion In The NFL

Similar studies have shown that loss aversion exists in other sports too. A study of the NFL showed that teams were more likely to ‘go for it’ on fourth and one if they had been in that position for a couple of plays rather than if they had arrived there after gaining nine yards in three plays. The decision making on that fourth and one is influenced by what went before.

When a team completes a first down at the one yard line, they have four plays at gaining that one year, and psychologically the attacking team has the expectation of scoring a touchdown, a win. After three tries at advancing, they are still at the one yard line, and the attitude is “I am not going to let this touchdown get away” and the next play is more likely to be another attempt at a touchdown than if they had started on the 10 yard line and advanced over those three plays. The attitude in this situation is, well we came close, but let’s take the three points. Incidentally, the study did factor in the score at the time, and the time remaining, because obviously a team down by two with five seconds left is going to kick the field goal!

We’ve all experienced the feeling of our favourite football team being ahead until the last minute, when the opposition scores a late goal and the result is a draw. In a league match, we get one point, the same as our opponents, but the game was, in our minds, won, and we lost something that we felt was ours, i.e. we dropped two points. The mood of our opponents to their one point is quite different. They had psychologically accepted that they had lost, that they were coming away with nothing, so ending up with a point was a gain for them.

Wins Are Not Equal

Back to the American code of football for possibly the best example of this, a college game between two famous Ivy League schools Harvard and Yale back in 1968. Yale went into the game as big favourites, with a record of 8-0 on the season, riding a 16 game winning run, and being nationally ranked.

A brilliant headline in the Harvard Crimson student newspaper the day after the game read “Harvard Beats Yale 29-29”, a headline which became the title of a documentary made forty years later which is well worth watching even if you have no interest in American football.

The story behind the headline is that with 42 seconds of the game remaining, the score was Yale 29 Harvard 13, and with Yale in possession, it was an almost certain win for Yale. After a fumble was returned for an unlikely touchdown, and a two-point conversion (the two-point conversion has been around in the College game a lot longer than in the NFL) attempt was successful, Harvard recovered the onside kick, scored another touchdown, followed by another two-point conversion, to tie the game. With no overtime back then, that was how the game ended.

Incidentally this game featured future Oscar winner Tommy Lee Jones in the Harvard team, although his roommate Al Gore didn’t play.

In Part Two, I’ll look at further evidence of loss aversion in sports, specifically in baseball and basketball, and take a look at how it affects our trading decisions, for those of us who trade sports.

Loss Aversion – Part Two

In Part One I reviewed loss aversion, and looked at evidence of it in the sports of golf and American Football, and now we turn our attention to baseball and basketball.

A study by authors Tobias J Moskowitz and Jon Wertheim looked at baseball, and the 3-2, or full, count. While this count can be reached in more than two ways, the study looked at 3-2 counts that started either 0-2 or 3-0.

Loss Aversion In Baseball

For those who are not familiar with baseball, the three is the number of non-strikes against the hitter (referred to as balls) while the two is the number of strikes. A player is out with three strikes, or on base with four balls.

This study is thus looking at situations where the count started off as a good one for the pitcher – at 0-2 he is thinking in terms of an out, i.e. a ‘win’, while a 3-0 start is good for the batter, who is thinking he is going to get on base, a ‘win’ for him.

The loss aversion influence was seen here too. With the pitcher up 0-2 and then falling behind, he is in the position where he expected to win, but is now at risk of losing that win. Conversely, the pitcher down 3-0 has gone from psychologically accepting a loss, to a position where he is now in with a chance of a win.

How do pitchers approach the next pitch? In theory, it shouldn’t matter how the 3-2 count was arrived at. All that matters is getting the batter out, but the evidence reveals that a pitcher is more likely to take an aggressive approach if they had earlier been 0-2 ahead than if they had been 0-3 behind. (An aggressive approach can be measured by the type of pitch thrown, with a change-up or curve-ball being more aggressive, with a fast-ball being the more conservative).

The mental reasoning here is, in the first instance, the win is mine and I am not going to lose it, versus in the second instance, well, I thought I was going to lose anyway, so no big deal if I do.

The emotional desire to keep the win is stronger than the desire required to gain the win.

Journey, Not Destination

Clearly the ‘result’ is not all that is important, but how you arrived there too. You might think that having a net worth of £5 million would please anyone, but someone who had £10 million the day before, only to lose half of it in a stock market plunge, is going to feel a lot less happy about it than that day’s lottery winner who paid for his ticket with his last pound.

It is often said in sports that a win is a win, but clearly all wins are not equal at all. As a game or an event unfolds, we adjust our win / loss expectations accordingly and our emotions, as proven by the above studies and others, influence our next move. As spectators, our emotional high is much higher with an unexpected comeback win than in a game where our team held a big lead only to hang on for the win after the opposition made a strong comeback. After a big lead has set the expectation level so high, to only just win is a relative low, and for the opponents who had all but conceded defeat, the stirring rally that came up just short leaves their supporters on something of a high.

Swings And Trades

While such swings are few and far between in sports such as football, they are certainly anything but unusual in a momentum sport such as basketball where almost every night during the NBA season, teams rally from double-digit deficits, and if they don’t always rally to win, they do make the sport one of the best to trade on the betting exchanges, and trading itself is very much a game, with traders, like players, not immune from the influences of loss aversion.

You often read on forums comments along the lines that ‘no one ever went broke taking a profit’. While that statement may be partially true, the problem is that the goal over the long-term is not to finish in profit, but to finish with as much profit as possible, and any one individual ‘win’ is insignificant. Locking in a profit isn’t, in itself, successful trading. What makes traders successful in the long-term is maximizing profits and minimizing losses, but this is made harder by our natural aversion to loss. If it affects the putting of Tiger Woods, which the gold study proved, and he has admitted in interviews to playing too carefully, then there’s a very good chance that almost all traders are affected too.

Loss Aversion In Trading

So how does loss aversion show itself when trading?

Having taken a position, for a trader the market can move favourably or unfavourably. It could do nothing for a while, but ultimately it will move in either direction.

Aggressive

If the move is favourable, you mentally start considering the win is yours. Perhaps the price drops to a level you consider too low, but you hesitate at greening up because you don’t feel like giving away some of ‘your’ win. You want it all. Greed drives your betting decisions at this point, and then the market starts to come back.

You’re still in profit, but not by as much as you were, but it’s starting to feel like a loss. The win that was yours is diminishing.

The current price is value, but you hesitate to lock in your smaller profit now, because you owned that earlier, and bigger, win. In essence, you are trading aggressively to keep what you felt was yours.

Conservative

If we take a look at the reverse situation, i.e. your initial entry point was unfavourable, and the market moved against you before recovering a little, you are in a situation where mentally you had accepted that you would be taking a loss, and the recovery feels like a win to you, and the emotion of fear encourages you to take the smaller loss, which feels like a win.

The two scenarios can be compared to the situation described earlier, where the pitcher started out either 0-2 (favourably) or 3-0 (unfavourably). The former leads to a more aggressive approach, the latter to a more conservative approach.

Of course, if you are staking correctly, the emotions of fear and greed are reduced, if not totally eliminated, and understanding the very real phenomenon of loss aversion will also help you to make sound trading decisions.

The Calendar Trap

One other handicap that several traders make the mistake of introducing to their trading is that of assigning some significance to their trading during an arbitrary time period. All that matters is maximizing profits in the long run, not that you made a profit on any one day, week or month. (‘Annually’ I might concede, since losing money over twelve months would be tough to accept mentally, and quite probably also means that you do not have the edge you thought you had).

To make decisions towards the end of an arbitrary period based on what went on earlier in the period makes no sense at all. While a day, week or month is a longer time frame than an at-bat in baseball, again the same principles hold true if you make the mistake of assigning some mythical importance to them.

Conclusion

Loss aversion is a powerful psychological force and understanding it can only enhance our ability to make correct decisions. The evidence suggests that it is so deep rooted that it is extremely unusual for anyone to be able to fully ignore it, but understanding it is at least a start.

And It's Goodbye From Him - Priorities

At least twenty-eight new followers on Twitter so far today, though I fear they will be somewhat disappointed given that my Tweets are few and far between. 

As is often the case with these surges of interest, the reason for the up-tick in interest wasn't immediately apparent, but a little digging revealed the reason, which is the retirement from trading of Twitter account:

@statsbet has been mentioned on this blog before, one of those rare individuals who actually questions claims and isn't afraid to swim against the current, so his reasons for quitting are worth reading. @statsbet posted two images, which are reproduced here.

He opens with the revelation that he has a young family, and as any readers with children will be aware, those formative years are precious, and once passed, can never be re-gained. There can't be many things sadder than spending hours a day on a computer at the cost of time with your children.

Easy for me to say, as my kids were babies at the time I ran into account closures back in the early nineties and was forced into giving up betting for many years, and grown by the time I discovered Betfair. 

I'd like to think that I would have put my kids first had the timing been different, but if I'm honest with myself, I'm not sure that would have been the case. I have a habit of trying to justify my actions in the rare event that they are less than perfect. 

Statsbet makes the point below that time is precious, and the amount of time spent trading football simply isn't justified by the 'meagre' returns. For most, the returns are negative, never mind meagre, and if your hourly return is less than the average wage, you'd be better off investing that time in a career. 

Apologies for the bad language below, but apparently Statsbet is passionate about his reasons:   

All very logical if you ask me. It's in the second part of statsbet's retirement letter that the reason for the increased traffic becomes apparent, and again be warned that there are rude words included:

So there you have it, in no uncertain terms, and when it comes to football, it's very true. You will not find an edge from looking at statistics, either pre-game or in-play. There are some big players involved with far more resources than most of us, and they are not in the markets to lose money to you. It's not what most people want to read, and I'm sure most will still carry on, illogically thinking that they have the unique ability of discovering an edge that everyone else has somehow missed.

Historical results from matches between clubs in previous seasons have no predictive value. Goal timings are well studied and understood, and you won't find an edge anywhere after seeing (along with everyone else) that Newport County have scored an early goal. The markets have all these variables factored in.

You can pore over all the stats you like, but they won't give you an edge, but if you can identify trends early as statsbet says, then you can surf the wave until it, as all waves do, crashes. 

Even the long profitable Bundeslayga appears headed for a loss this season.    

April Baseball

April was a solid enough for followers of the MLB Systems I said I'd be following. 

After 15 selections, the T-Bone strategy is up 1.15 points:

The Implied Probability > 0.75 System had just the one selection, and one winner and has lost just three times in the last 35. This is not a system for the impatient, with an average of about eight selections a season, although last season saw 21 picks which was very unusual.

In the last 50 years, only two MLB teams have ended the regular season with a .700 record or better.

In 1998, the New York Yankees had a .704 record and in 2001, the Seattle Mariners had a .716 record.

On theflip-side, only the 2003 Detroit Tigers have finished sub .300 in that time.

In other words, baseball is as even a playing field in sports as you'll find in major sports. 

For many years, the reverse favourite-longshot bias held true in baseball, but as I highlighted in 2015, this ceased to be true around 2011.

Especially in April.

Dopey

In my last post, on the topic of Warren Buffett and staff's voracious reading habit, I wrote:

Reading, and the consequent thinking, drives the generation of ideas, something I find also comes with exercising and writing.

Einstein begs to differ. Courtesy of a tweet from @Scaamberry, it appears that Einstein once said:

Reading, after a certain age, diverts the mind too much from its creative pursuits. Any man who reads too much and uses his own brain too little falls into lazy habits of thinking.

My opinion of this is that Einstein's definition of "reads too much" is an amount that none of us today are likely to get anywhere close to. 

If there is a Laffer Curve for reading, I'd suggest we are almost all certainly to the left of the maximum. 

Besides, does this look like a man with an aversion to reading?

The aforementioned Twitter account @Scaamberry linked to a review of Caan Berry's Betfair Trading Guide, and Pre Race Video Pack posted by a Ben on Sunday. Thanks also to Tony for emailing me this link.

Check the review out for yourself. I thought the review was quite respectful, fair and reasonable, so it was disappointing to see evidence of threats to the reviewer produced towards the end, for example:

I hope the police have indeed been informed as the reviewer stated. If you're genuinely threatened, of course this is an appropriate course of action. 

If someone writes something about you that you disagree with, surely a better response is to show why the claim is false. 

Since this review was published Mr Caan Berry has communicated explaining that his ‘Trademark’ is being infringed, which is not the case. Mr Berry does not have legally owned Trademarks for any name, or product mentioned on this review page. This we have checked with the relevant Trademark registry.

No trademarks have been registered, or infringed for any product or name on this review.

Subsequently, Mr Berry then tried to go down the ‘removal under defamation route’; again, this was declined as there are no defamatory, or false-hood statements on this review. When asked on multiple occasions for reference points to the offending content, Mr Berry could not provide this.

The lengths that Caan Berry appears to be willing to go to, led the reviewer to finish with:

Something else that cannot go unnoticed, again based on the determination to censor this review, is that going against an earlier section of this review, it becomes obvious that the publishing and product side on Caan Berry’s income must be larger than first anticipated, which suggests that possibly he is now a product vendor first, and a trader second.

That seems like a reasonable conclusion given the available evidence.