This article was originally published here in August 2002
With the continuing falls in the stock market I am going to describe a money-making scheme of mine that does not involve shares. The fact that it involves gambling may put you off, but please stick with me while I explain.
My favourite style of stock market investing is value investing; buying shares I feel that the market is undervaluing then waiting for the share price to rise. I feel that sometimes a value bet exists; a bet whose odds are out of line with reality.
Imagine a football game between Arsenal and Liverpool. A bookmaker might be quoting odds of an Arsenal win at 8/11, the draw at 3/2 and a Liverpool win of 3/1. A useful technique is to convert these odds to percentages.
For odds of x/y the percentage odds are y ÷ (x + y). For our example the percentage odds are Arsenal 58%, the draw 40% and Liverpool 25%. A quick addition shows the odds total 123%. That extra 23% is the bookmaker’s profit.
He is aiming to ensure that no matter what the outcome of the event the loosing bets gain him more money than he has to pay out on the winning bet.
It is important to understand that the collection of odds for all the outcomes of a particular event forms a market. Odds obey the usual rules of supply and demand.
Using our example above the bookmakers might find that gamblers think the odds on Liverpool are too generous (i.e. gamblers think Liverpool have a greater than 25% chance of winning). The extra money being bet on Liverpool will unbalance the book, forcing the bookmakers to reduce the odds on Liverpool and increasing the odds on Arsenal and the draw. These changed odds should attract money onto Arsenal and the draw, causing the bookmaker’s book to return to balance.
The fact that a bookmaker’s odds reflect the relative amounts of money staked rather than the true chances of winning means that we can occasionally find a bet that is being offered at very generous odds.
One gamble that my father has successfully made for many years is to bet on any team that England plays at football. Many people make a patriotic bet on England, distorting the bookmakers’ odds. Over time, a series of bets on England’s opponents can be nicely profitable.
Spread betting is a form of betting that has become popular during the last few years. I find that spread betting offers many more value bet opportunities.
Most spread bookmakers run a spread market on the number of league points each premiership football team will finish the season with. A few bookmakers run a far more interesting spread; adding an adjustment or handicap to the weaker teams to even things up.
All teams start at the same price but as the season progresses the prices of teams than do better or worse than expected can move by large amounts. Not many people seem to follow this particular market so value bets can exists for days, giving me plenty of time to notice them.
I am looking for prices that are out of line with reality. I use a simple method to detect these.
I have a spreadsheet that tracks the points won and games played for each team. Dividing points by games gives the average points won per match. Multiplying this by the number of matches played by a team in a season gives me a prediction of the number of points a team will finish the season with and thus the final league table. To this I add the handicap to form the adjusted final league table. I then compare these predicted finishing places with the current prices. I bet on any team whose current price is too out of line with my prediction. I’ve only made a few bets over the past couple of years but they have all been profitable.
I find value betting a nice sideline to the stock market. A small bet can make a football match much more exciting. Remember though, only gamble with money that you can afford to lose. Buying the wrong share may loose some of your money; the wrong bet will be a 100% loss every time.