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Betting as investing

Can betting be regarded as a form of investing?

The answer to this question really depends on your approach to betting – what you want from it and perhaps most importantly, your attitude to risk.

One dictionary definition of invest is ‘to commit capital in order to gain a financial return’.

When investment comes to mind, many of us will probably be thinking in terms of stocks & shares or unit trusts, or perhaps of buying property to let. When considering these typical investments, the chances are the investor will be quite clear about how much capital they will need to commit – or how much of someone else’s capital they will need to borrow! (1) – and of course they will only make a commitment if they expect to achieve a certain level of financial gain. If you can think of betting in this way then the answer is yes, betting can be regarded as a form of investing.

In addition to capital commitment and the expected return, successful investors will have two other fundamental considerations:

  • Risk – the potential for the investment to lose capital
  • Timeframe – how long capital is committed in order to see an expected return

We all know people who have the occasional bet on football at the weekend or a little flutter once a year on the Grand National – placing a bet based on instinct, at random or maybe because they like the name of a horse. We probably also know those who ‘like a bet’ on a more regular basis who usually have a variety of both rational and emotional justifications for the bets they place. Psychologically most betters will invariably be parting with money they can afford to lose (or not as the case may be) and a win is regarded as a bit of a bonus. By our definition, these are not investors – gamblers is perhaps more appropriate.

Many gamblers tend to focus on the outcome of a bet rather than the returns it may generate relative to the risk they are taking. Don’t get us wrong, there are some very good gamblers around who have an excellent instinct for the winners. Most however lose money over time. It is estimated that less than 5% percent of people who bet on sports make a profit in the long term – the rest are making a loss. (Which is why, as the saying goes, you don’t often see a poor bookmaker.)

Investors by contrast – whether buying shares, property, or betting on the outcomes of football matches – will insist on understanding the potential returns and the risks involved. In the professional world of investment (our background is in fund management) this is known as the risk – return profile.

Investing in the betting markets requires the investor to seek out opportunities where the potential returns outweigh the risk of losing money. This is known as value betting. Put another way (for an individual bet) the true likelihood of a positive outcome needs to be better than the odds suggest. The next sections look at odds and then how these relate to value betting.

Another lesson we can learn from the stockmarkets is how to reduce risk through diversification: rather than make one large investment in the shares of just one company, make multiple smaller investments across a range of companies. This way, if one company’s fortunes are not good and the share price plumets, the impact on the overall portfolio is minimised. Exactly the same principle can be applied to betting – make a number of small bets instead of staking your whole bankrole on one ‘banker’. As we all know, there is no such thing as a surefire winner. The section ‘Managing risk’ looks at this and other ways of limiting your losses in some detail.

(1) We are not suggesting in any way that it would be wise to borrow money to bet with. The reference simply implies mortgage borrowing for property investments. You should only consider betting with your own money that ultimately you can afford to lose if results go against you.

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