Onto a Winner: Sure Thing!

Determined to harness wealth and prosperity heading into Dragon Year, Joe Dobbs explores the similarities between racetrack betting and successful stock-market speculation Looking back, I realise that gambling is in my blood, as is my ability to spot a winner. In the UK when I was growing up, my father bet on the horses (and on occasion the dogs). He relied on tips from fellow punters, and in the press, but most of his bets were based on a hunch, little more than a feeling for a horse’s name and good odds. Dad never bet more than he could afford to lose, and sometimes he’d win big. Those successful race days, when we’d come home with our pockets stuffed with 20-pound notes, are the ones I remember. Of course, most people who bet on horse races not only lose money, they lose much more money than they should lose based on chance alone. What this means is that someone making purely random bets on horses, will, over a long period of time, lose the track’s “take”. The take is a fixed percentage, usually in the 10 to 20% range, that is extracted by the track (or jockey club) out of the total amount of money bet on each race. The remaining 80 to 90% is paid out to the winning bettors. However, the average Joe actually loses 33 to 100% of the money he shells out over the course of each racing day. While the vast majority of people lose at the races, some betting professionals consistently win. These professional bettors generally do not have inside information or any resources that are not readily available to members of the public. Nor is it usual for them to be highly educated. So how do they do it? FORM STUDY Studying horse racing form is a way of directly informing yourself about the competitors in a horse race, based on their achievements to date. Punters take into account the horse’s weight and progeny, its trainer, jockey, current weight and recent race history. They even factor in the weather, since some horses show a marked preference for running on a particular ground or “going”. For example, one horse may show his best winning form on ground that is “good” or “good to firm” (on a track where there has been little recent rain). Other horses will run to their best form if the ground is wet, if the going is described as “soft” or “heavy”. Form study can be profitable, but it is often misleading and difficult to read; like anything else in life, the more seriously you study it, the better the results. And the same goes for the stock market. For serious speculators, it’s all about analysis – working out how to base decisions on the current price/ value of an asset coupled with its future expected outlook. ON THE MARK Doing due diligence certainly puts you ahead of the game. But to my mind, the real key to coming out tops in any speculative game is to bet against popular opinion at all times. This principle certainly applies to the stock market and is the reason I spend so much time analysing sentiment indicators. If my analysis is on the mark, then I know what other speculators are thinking and can, at the appropriate time, do the opposite. While the vast majority of people lose at the races, some betting professionals consitently wine. So how do they do it? There is, of course, added complexity in the stock market or any financial market for that matter, since there isn’t a fixed pool of money that is distributed at fixed points in time based on a set of clearly defined rules. There is, therefore, a critical timing element in the financial markets that is not present when betting on horses. In horse racing, betting against the public involves the identification of “overlays”. These are situations where the odds assigned (the odds at which a horse runs are determined by the amount of money bet on that horse relative to the amount of money bet on the other horses in the race) are longer than they should be. In other words, the risk/ reward ratio is in favour of the person betting. For example, if a professional determines that the correct odds for a particular horse are 2:1 whereas the public’s betting puts the horse at 10:1, then he has identified an overlay and may decide to bet on that horse. If a professional determines the correct odds to be 2:1 and the horse is quoted at 2:1 then he would certainly not bet on that horse because in such a case the likely upside and downside are the same. PUNTER’S PARADISE This leads me to another important difference between the consistent losers (the public) and the consistent winners (the professionals). Most racegoers bet on every race, whereas the professionals only bet on those races in which they have identified an attractive overlay. The principle of only putting money at risk in cases where there is an attractive overlay applies perfectly to stockmarket speculation. An overlay in the stock market would, for example, occur if the stock of a company is dramatically under-valued based on the cash that it is currently generating, or is likely to generate in the future. In other words, the market value assigned by the public is low compared to the company’s intrinsic value. Another factor contributing to the public’s losses in the game of horse racing, and in all speculative endeavours, is something called “switches”. It’s my belief that it’s not the races that beat the amateurs, it’s the switches. Whereas the professionals develop a plan and stick to it, amateurs are continually changing (switching) the bets they make, the amount they bet and the way they select horses. Most speculators in the financial markets have experienced the frustration wrought by switches: that is, they will at some point have been coaxed by a market to switch strategies at exactly the wrong time. Successful market players and racetrack bettors have figured out a way to avoid switches. An important part of this avoidance is only ever to speculate in those instances when you have identified an attractive overlay. Do this, and you might soon be winning like a pro.