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Sports Betting as an Investment

Sports Betting as an Investment

One of the best ways to look at sports betting is an investment. If you’re just betting on sports as entertainment, it’s okay to have a negative financial return on your investment—but only if you’re seeing a positive return in terms of joy and fun. Most people who are reading about sports betting tips on the internet, though, think it’s a lot more joyous and fun to have a long term winning record.

My thesis is that sports betting is comparable to almost any other investment in multiple ways. If you begin and end your thinking about sports betting as an investment opportunity, you’ll make different—and better—decisions about your money. This will result in more winnings.

And let’s be honest—winning is SO much more fun than losing.

Here are some actionable thoughts and observations related to investing in sports betting.

The Sports Book as Marketplace

Occasionally you’ll run into people who bet on sports with their buddies on a social level. This isn’t the same thing as betting with a sports book. It is still an investment, though. Think of betting on sports with a buddy as being analogous to buying into a local business rather than investing in a public company.

Most people who bet on sports will eventually be dealing with a sports book. (And you’ll find multiple names for a sports book—book, bookie, or bookmaker all apply.) The origin of this name comes from the “book” that the bookmaker uses to track the wagers that are being placed by his customers, the money his customers owe him, and the money he owes his customers.

When you bet on sports, you’re predicting outcomes and putting money on those predictions. You need someone to take the other side of that wager.

It doesn’t matter what sport tickles your fancy, either—somewhere there’s a book that will accept your action. You can bet on any and all of the following sports at online books these days:

  • Auto racing
  • Baseball
  • Basketball
  • Boxing
  • Football
  • Golf
  • Hockey
  • Mixed martial arts

And that list barely scratches the surface. These days, you can even bet on the outcomes of people playing e-sports—which are basically just video games like Madden.

Books also sometimes take bets on outcomes of other events that aren’t sporting related. This can include who wins at the Academy Awards, who wins elections, and what happens on scripted (or non-scripted) television shows.

Risk versus Reward in Sports Betting

In the United States, bookmaking is illegal in most states, although that’s changing rapidly. Neighborhood bookmakers who work outside those laws are called “bookies.”

These laws are rarely enforced, but when they are, the enforcement largely targets the bookies, rather than their customers.

Many people also place bets with offshore sports books. These are companies that are operating with licenses from another jurisdiction in the world where sports betting is NOT illegal. There’s some legal question as to whether a bet placed with such a company takes place in their country or ours. I don’t know of anyone who’s been arrested for betting with an offshore sports book, although I do know of occasional folks who have been arrested for taking bets from United States players.

From this perspective, the prospect of investing in sports betting makes it a higher risk investment than investing in the stock market, for example. Any type of investment opportunity requires you to look at the relationship between risk and potential upside.

The Sports Book as Marketplace

But the most important thing to understand about the role of bookmaker in this investment is that he’s the marketplace. He takes bets on both sides of any contest. He uses tools like moneylines, point spreads, and commissions to ensure his profitability.

The moneylines and point spreads represent the terms of the bet. Any bet you place has an expected value, which is the long term expected amount you’ll win or lose on average if you repeatedly make that bet.

Here’s an example:

The New England Patriots are probably the strongest team in the NFL. The Cleveland Browns, on the other hand, are probably the weakest team in the NFL. If someone offered you a straight-up, even-money bet that the Browns will win a game versus the New England Patriots, that’s a valuable proposition for you.

You calculate the expected value of a bet by multiplying the probability of winning that bet by the amount you’ll win. Then you multiply the probability of losing that bet by the amount you’ll lose. Subtract one number from the other, and you have the expected value for that bet.

Just to make this easy, let’s assume that in this hypothetical situation, the Patriots have a 90% probability of beating the Browns. You bet $1000 with your buddy Brian on this game. If the Patriots win, you get $1000 from Brian. If they lose, Brian gets $1000 from you.

  • $1000 X 90% = $900
  • $1000 X 10% = $100
  • $900 – $100 = $800

The expected value of that bet is $800 for you, and it’s -$800 for Brian.

Brian might be a big enough idiot to give you that action, and if he does, you should take it.

A professional bookmaker won’t give you that action, though, because they have to stay in business.

The first thing they’re going to do is require you to wager $1100 to win $1000. That extra  $100 you’re risking represents the juice (or “vig”). It’s a commission the book charges to take your action.

With that single change, the expected value for this bet changes, too:

  • $1000 X 90% = $900
  • $1100 X 10% = $110
  • $900 – $110 = $790

Still, an expected value of $790 is a good bet. Most people are going to take that bet, because they know how strong the Patriots are—especially compared to the Browns.

The next step the bookmaker is going to take is to include a point spread as a term of their bet. They’re going to give the underdog (the Browns) points to add to their final score for the purposes of determining the winner. These points are there to theoretically make this bet more of a 50% probability.

They might determine that the Patriots will probably win by 10 points or more. They’ll list the bet like this:

New England -10 (-110)
Cleveland +10 (-110)

The favorite is the team with the – next to the point spread. This means when the final score comes in, you’ll subtract 10 from their points to see if they still won the game.

The underdog is the team with the + next to the point spread. This means when the final score comes in, you’ll add 10 from their points to see if they still won the game.

If New England scores 33 points, and Cleveland scores 10 points, New England would be the clear winner of the bet. Even adding the 10 point handicap to Cleveland only gives them a score of 20 points.

On the other hand, if New England only scores 14 points versus Cleveland’s 10 points, Cleveland wins the bet. They “covered the spread.”

The bookmaker’s goal is to get 50% of their customers to bet one side of the game and 50% of their customers to bet the other side. The point spread represents the “price” of that bet.

If the point spread isn’t high enough to stimulate action on the other side of the event, the book will change it until it starts getting action on the other side.

This is why the sports book acts like a market.

If you think of a marketeplace like an investor does, you start looking for value.

But let’s talk about “value” a little later. I want to discuss some other aspects of treating sports betting like an investment, first.

Your Sports Betting Bankroll Represents Capital

When you make an investment in something, you put money into it. It can be a savings account, a money market account, a bond, or a stock. Over time, you’ll get money in exchange for that investment. It might come as a guaranteed interest payment, or it might come in the form of dividends from a stock or an appreciation in stock price.

You can always translate what you get from that investment into an annual percentage rate. It’s the percentage of the money you have tied up that you got in exchange for investing in that money.

You might put $10,000 into a savings account that pays 1% annual interest. This means that after a year of having that money in the savings account, you get $100 in interest.

Or you might buy a bond that pays 3% annual interest. After a year, you get $300 in interest.

You might invest in a stock that pays dividends. Dividend rates vary, but with some companies, it’s not unusual to see returns of 6% on dividends. This means you get$600 in interest on that investment.

If the stock price increases, you get returns based on that, too. If you buy 100 shares of stock for $100 each, and the stock goes up to $115 in a year, you’ve seen a $15,000 annual return, or 15%.,/span>

Each of these investment opportunities comes with a certain amount of risk and a certain reward. A savings account has minimal risk. Banks just don’t go out of business much anymore, and if they do, that money is insured by the federal government now.

With a bond, you might need to withdraw the money early. If you do, you pay penalties for that early withdrawal. It’s low-risk, though, because bonds are issued by the federal government.

Stocks, on the other hand, are much higher risk, because their prices  fluctuate. You run the risk of the stock going down or even becoming worthless.

Your Bankroll as Investment Capital

When you invest in a sports betting hobby, you’re setting aside money in the form of a bankroll. You invest little pieces of that bankroll into multiple bets throughout the season (although you could theoretically bet your entire bankroll on a single football game if you wanted to.)

Since you’re treating your sports betting hobby as an investment, though, you’re going to try to balance your risk with your potential upside.

Let’s look at that example above with the Patriots versus the Browns. If you have a total bankroll of $10,000, and you can find someone who’s willing to bet straight up with no point spread on the Browns, it might seem like a no-brainer to take that action. After all, you have a 90% chance of doubling your money.

On the other hand, you have a 10% chance of losing all your bankroll.

This might or might not be acceptable to you. Most sports bettors prefer to spread their action out using multiple bets, because you’ll rarely find opportunities to get a bet that will win 90% of the time.

In fact, if you find someone who claims to be able to pick winners against the spread 70% of the time, run for the hills. The best professional sports bettors average between 55% and 60%. This means they’re losing their bets almost half the time.

When you’re losing your bets almost half the time, it’s important that you not bet so much on any single event that you risk going broke.

You also need to take into account the effect of the vig on your investment. It’s not enough to win 50% of the time or even 51% of the time when you’re risking $110 to win $100.

Here’s the expected value of a 50% bet with the normal vig:

You have a 50% chance of winning $100, which equates to $50.

But you also have a 50% chance of losing $110, which equates to $55.

The expected value of such a bet is -$5. That’s the average loss you’ll see over the long run making bets that you win half the time.

With a bankroll of $10,000, you’ll lose all your money, on average, after making 2000 bets of $100 each.

Even if you win 51% of the time, you’ll lose your money.

51% chance of winning $100 = $51

49% chance of losing $110 = $53.90

So you’re losing an average of $3.90.

The point where you’ll start seeing a consistent profit is when you’re winning 53% of your bets or more:

53% chance of winning $100 = $53

47% chance of losing $110 = $51.70

You’re winning an average of $1.70 for every $100 bet you place, on average, in the long run.

It’s hard to overstate how much the vig affects your return on investment, by the way. If you’re a small bettor, making low wagers, you might need to risk $120 to win $100. Look at the effect this has on your win rate requirement for a profit:

53% chance of winning $100 = $53

47% chance of losing $120 = $56.40

You’re losing $3.40 per bet on average even though you’re choosing the winner 53% of the time.

On the other hand, if you’re betting enough, and if you have a good relationship with a book, you might be able to get a lower vig. You might only need to risk $105 to win $100.

In that case, your return on investment goes way up on the same winning percentage:

53% chance of winning $100 = $53

47% chance of losing $105 = $49.35

Now your expected value of that bet is $3.65.

Since all our examples have used $100 as their dollar amount, it’s easy to translate that expected value into a return percentage, but it’s not an annual return. It’s a daily or weekly return.

If you win an average of $3.65 on every $100 bet you place, then you’re seeing a 3.65% return on investment every time you place the bet.

You can translate that into an annual number after getting in a year’s worth of results. You just look at your total bankroll versus how much you won on it.

How to Find Value in the Sports Betting Marketplace

How do you do this, though?

How do you find betting opportunities where you can win 53% of the time or more?

Most sports bettors do this by handicapping or just paying attention on point spread movements. The handicappers who work for the books are the ones who set these point spreads. They’re not infallible. Just because the book offers a 10 point spread on a game doesn’t mean that the bet is a 50/50 probability.

In fact, if the public is moving the point spread based on how much action the book is getting on one side, the book will offer a point spread that doesn’t represent a 50/50 chance. They’re just trying to balance their books.

Many sports bettors start there in their search for value. Usually this represents taking a close look at the underdog. Most of the sports betting public prefer to bet on favorites even when the point spread is big. This can result in line movements that provide opportunities for sharp bettors to get a better than 50% chance of winning.

There are other ways to find value, too, especially when you’re shopping lines at multiple books. Obviously, if you can get the same bet at one book wagering $105 instead of $110, there’s a move in value to that bet.

Keeping Detailed Records as a Sports Bettor

As with any investment, you don’t know how well you’re doing unless you keep detailed records. You should know exactly how much money you’ve wagered on what during the season. You should know which bets you’ve won or lost.

Most importantly, you should know how much you’ve won or lost over the course of the season. And you need to break that down into a return on your investment. Since your returns come so much faster than annually, you can see returns on an investment in sports betting that won’t compare to anything but the best stock market opportunities.

This is because of the effect of compound interest. As you continue to book wins, the size of your bankroll increases. As that happens, you’re able to place bigger bets, increasing the amount of money you’re making.

If you’re good enough at sports betting—if you become a sharp—you’ll eventually hit a point where your bankroll is so large you’ll need to find ways to get your money into action. Some big sharps use multiple runners to place bets on their behalf.

Bookmakers don’t like taking big bets from sharp bettors. It messes up the validity of their market prices. It can also force them to lay off a certain amount of action to other sports books to reduce their risk.

The average person with a bankroll of $10,000 doesn’t have much to worry about, but you grow that into a bankroll of $1 million—which is possible—you’ll start to need to deal with those kinds of details, too.

Conclusion

Sports betting is just a hobby for a lot of people, and that’s okay. For other people, though, it’s a way to earn money on a consistent, reliable basis. If you’re good at finding value, investing in sports betting is as low risk an activity as picking winners in the stock market. And for some personality types, it’s more fun than the stock market.

If you think you want to become a professional sports bettor, the best approach is probably to treat it as an investment opportunity. As with any investment opportunity, though, you want to compare it with your other opportunities. If you can only earn 0.5% annually via sports betting on your bankroll, you’re better off putting your money elsewhere.

And, of course, if you can’t win often enough to make a profit, it’s not an investment at all—unless you think of it as an investment in entertainment.

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