Betting like Buffett

Betting like Buffett

He is regarded as the most successful investor of the 20th century, and is regularly listed as one of the wealthiest people in the world. As CEO, Chairman, President and the largest shareholder of Berkshire Hathaway, Warren Buffett is considered one of the leading authorities on investing, with many of his fundamentals copied by would be billionaires around the globe.

While it may not seem obvious on the surface, sport betting and stock market investing have many similarities. Both have buyers and sellers, need strong money management skills, and require skill and discipline to be successful.

These similarities have not been lost on many, including some of the richest people in the world.

Billionaire owner of the Dallas Mavericks Mark Cuban first floated the idea of a sport betting hedge fund on his blog in 2004. While the concept may have seemed like fantasy, there have been several sports betting funds launched since.

In 2009 Priomha Capital  launched in Australia, while in 2010 Centaur Galileo became the UK’s first sport betting hedge fund. Centaur Galileo would eventually fold after several years of trading, however Priomha Capital continues to provide its investors with a return on their investments.

While it is very easy to emulate Warren Buffett’s investment strategies (or even copy them exactly by purchasing the same portfolio of stocks as Berkshire Hathaway), in the stock market, are there also some lessons we can learn to apply to our punting?

In this article we look at what you can learn from the world’s greatest investor, and how you might be able to use some of his strategies in your “sport investing”.

Invest don’t speculate

“Look to the asset itself to provide the return, not the price of the stock” – Warren Buffett

For to many investors, stocks are purchased because a company “is a good company”, or “the price is going up”, or “the price is going down”. But does this make it a good investment?

For Warren Buffett and his Vice-Chairman Charlie Monger, it is through thorough analysis of a company that its earning power and potential is determined. This earning power is what is used to determine the value of the company and any purchase decision.

Buffett and Monger have a number of different characteristics they look at when analysing a company. This includes company management with integrity and talent, and the business having intrinsic characteristics which give it a durable competitive advantage (Buffett’s famous “economic moat“).

The concept of “investment” is equally as applicable to sport betting as it is to the stock market.

Like stock market investors who purchase shares for superficial or price reasons, many punters make simple mistakes by not properly assessing a team or player in an upcoming match. Betting on a team because the are “on a streak”, “haven’t lost at home this year”, “are due for a win”, or even worse placing bets simply because high odds will lead to a big payout.

Rather than through this speculation, it is through the thorough analysis of teams and players that potential bets can be found. By developing handicapping models and the predicting of the probability of an outcome more accurately than the market, a punter can place positive expected value bets which will lead to a profit over time. Investing rather than speculating.

You don’t have to diversify

“I stick with what I know. If someone owns 50 stocks, can they really like the one they rank as number 50 as much as the one they rank number one? Can they know it as well? I don’t think so.” – Warren Buffett

Take a quick look at Berkshire Hathaway’s current stock portfolio and you will see a range of companies in a variety of different industries. Among these are some of the biggest and well known companies on the planet. From Proctor and Gamble, to Wallmart, Coca-Cola to Wells Fargo, the list of companies wholly or partially owned by Berkshire Hathaway is impressive.

But looking through the list you might notice something very curious, there are very few tech stocks or companies. And in an age of Facebook, Google, Apple and investment in Silicon Valley start-ups this definitely isn’t the norm.

So why not invest in some of the world’s leading and most innovative companies, or try to uncover the next “big thing”?

Buffett simply doesn’t understand the business.

It’s easy to understand how Coca-Cola sell bottles of soft drink, GEICO sell insurance, or Proctor and Gamble sell everyday consumer products. But tech companies selling apps and developing new technology are a much more complex beast that Buffett struggles to value so prefers so simply sit on the sideline.

The internet and modern online bookmaker is one of the best things that has happened for sports punters. Not only is it possible to compare the odds of literally hundreds of different books from around the world at the click of a button, but you can do so on a nearly unfathomable number of sports.

But betting on sport can become a very slippery slope. Starting out with a punter’s favourite sport that they know inside out, the temptation to bet on other sports can simply be to much. All punters are only a click away from betting on Polish Women’s Volleyball and the Maltese Premier League because they are the next events to start.

For punters it is important to “bet what you know”. If you don’t understand a sport well enough to accurately predict the probability of the outcome, just like Buffett with tech stock you simply cannot find value in the market.

The market is there to serve you

“Mr Market is there to serve you and not to instruct you” – Warren Buffett

Just like a stock exchange, the comparison of bookmaker prices across the internet is simply a market where buyers and sellers come together.

Buffett has made a literal fortune not just by purchasing stocks and companies, but by purchasing them at a price which is providing value. Value in a stock or company can either be in the assets owned by the company (if the value of assets owned by the company exceed the sale price), or through projected future earnings potential.

This is of course very similar to betting on sport.

Just like a punter, Buffett weighs up the talent in the organisation, looks at its past performances, analyses the competition, and using this knowledge predicts what the future performance will be and gives an overall value of the company.

This is no different to handicapping sport. By assessing players, past performances, and the opposition it is possible to allocate a probability of a team or player winning a given match.

“Every day he gives you that offer, and when he’s wrong you take advantage of him. But you don’t start paying attention to him to tell you if you’re right or wrong.” – Warren Buffett

But just because a company will make money in the future doesn’t automatically mean Buffett will make money on his investments. The same applies for punters, just because a team is assessed as having a higher probability of winning doesn’t mean they will necessarily win the match.

The key for both Buffett and punters is value.

For Buffett this involves allocating a value to a company and watching the market. If a stock is priced above Buffett’s price he doesn’t buy. If it dips below, he buys the stock.

This is no different for punters looking at placing bets on sport. It is vitally important that any punters only place positive expected value bets, that is only bet on an outcome when the available price exceeds the probability you have allocated for the outcome occurring.

 “We make our own appraisal, and when the market has a different appraisal we back our own instead of the market appraisal.” – Charlie Monger

Buffett is also a strong believer in backing his own judgement. Just because the market decides a stock is over or under priced, it doesn’t mean that Buffett follows the crowd. Buffett trusts that his analysis is right, and that over the long term his valuations are more accurate than the daily fluctuations of the market.

Similarly, when betting it can be dangerous to follow “market movers”. While many punters have attempted to make a career out of “chasing steam”, the best long term betting strategy is to simply place positive EV bets with good bankroll management.

Allocate capital efficiently

In 1951 the then Columbia University student Warren Buffett made his first purchase of stock in the insurance company GEICO. By 1996 Buffett’s Berkshire Hathaway had purchased the entire business.

As we’ve learnt already, GEICO was a company Buffett knew and understood, and provided value in its stock price. But GEICO also provided Berkshire Hathaway with something few other businesses under its ownership could. Money up front.

Unlike most other businesses such as traditional manufacturers and retailers where stock is paid for before a customer walks in the door, insurance companies receive premiums from customers up front before claims are paid out. This means that large amounts of capital are available from GEICO for Buffett to then allocate to other businesses within Berkshire Hathaway, or for new investments.

For punters, efficient capital allocation simply means strong bankroll management.

It is impossible to place bets if your bank has run out, or you have large amounts of the bank tied up in futures bets. This means that it is very important to have not only an understanding of bankroll management, but have a strategy selected that best suits your punting style, goals and bankroll size and a strict plan in place to ensure you stick to the strategy.

“More smart people have gone broke through leverage than through any other activity” – Warren Buffet

Perhaps the most important lesson for anyone starting their betting bankroll we can learn from Warren Buffett is to only bet what you can afford.

Buffett does not recommend leveraging investments. This involves borrowing money to purchase stocks, and hoping that the value of the stocks does not decrease in value, and that the dividend payments outweigh the interest on the loan.

Even though Buffett doesn’t recommend leveraging, it is an accepted practice in the financial industry and is available to most people through their bank. Borrowing money for a betting bankroll of the other hand should never be done.

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