Is the betting market efficient?
You have probably read countless studies that show how efficient the betting market is. They can sound pretty convincing and, in general, I’d say they are right. You will have also seen how the financial markets are also efficient for similar reasons. Again, I’d say that was sort of right. Note my decline confidence here.
If my lack of enthusiasm is starting to show, then I’m glad you are hearing that, as I’ve seen first-hand how both arguments are flawed. I’ve worked hard over many years to explain it, but much more important than that, I’ve put a lot of my own money behind my views to prove that, in fact, markets do not work the way some people think.
Yes, I’m about to enter year 22 of betting for a living, or trading or whatever you wish to call it. It doesn’t matter, I’m still doing it.
Thank you Mr Buffett & Munger
I think most people often get the feeling that something isn’t quite right with the world.
My first inkling that I was on the right track was when I invested in Berkshire Hathaway and started listening to the musings of Munger and Buffett. They would often talk about how human nature was one of the reasons for their astonishing success and how behaviour, especially under uncertainty and stress leads to mistakes.
It would take years before I truly understood this.
Value betting and efficient markets
I started my ‘career’ in value betting and arbing.
Arbing just exploited price differences between bookmakers, then betting exchanges. As the range of activity and sports grew I started pricing up more and more markets to test how efficient the markets were. I came up with various models for different sports, football being the first.
When I started to look at racing markets I started to realise odd things were happening. The market was efficient, but also inefficient at the same time.
I remember looking at a two runner group race at Goodwood. Both horses had won over course and distance, were equally rated and for a short time the same price. But from there the prices diverged dramatically. There didn’t seem to be much logic in that and it resulted in the situation that one price was too short and one too big.
It was obvious to me that in five minutes, the chance of a horse improving or there being new information couldn’t change the price that much, therefore it must be inefficient.
But if you looked at it from a market perspective, then from a statistical perspective, the price on one cancelled out the other. The market was displaying efficiency at a top-level, this was because one won and one lost the odds of that happening were 100%. But on an individual level, the market was anything but efficient.
For the record, the horse that drifted like a barge won.
Trading and efficient markets – String theory
Trading markets are also efficient by many academic standards. At any one point, they reflect the value of discounted information.
I generally wouldn’t disagree with this concept, but where it falls over is that it’s not an accurate description of how you profit when you trade. Again, describing a market is very different from profiting from it.
Imagine a piece of string stretched out. You have the start point, the endpoint and the path it follows between those two points. The market, in aggregate, is efficient at each point. As we move towards the final price we get more efficient as new information is discounted.
But the market doesn’t work like that. It’s more like a tangled piece of string meandering up and down before it reaches that endpoint. A mixture of opinions, emotions and a whole gamut of other stuff. It’s slightly chaotic at times.
The difference in length between the ‘efficient’ piece of string and the one that is more representative of the market, is where the value is created when trading. That is where the profit is coming from.
That’s the reality of trading. You profit from uncertainty, not efficiency.
So that’s the theory, what’s the reality?
Of course, it’s quite easy to pick holes in any of these points I’ve made above. They are just very short summaries of my observations over a large number of years. So they are wide open to individual points being argued about. It’s impossible for me to convey all my knowledge over many years in a concise form. You will see holes.
But there is one fact that isn’t open to any level of interpretation. Beat the market for one year could be a fluke. A few more years of outperformance could also be a possibility if it were luck alone. But I’ve now been doing this for over two decades!!
Last year I actually did better than the year before and, especially after all this time in the market, that’s a significant outperformance especially in markets that have been flat or in decline on my chosen platform, Betting exchanges.
After so long in the markets, I find that my opportunity is limited only by the scale of the markets and the number of opportunities they present. Those things are out of my control in terms of scope and scale, but those opportunities are ever-present.
Of course, things are not that simple because everybody would rush in and correct inefficiencies, wouldn’t they? But I’ve watched on in these 20 years and watched people fail repeatedly to do that or repeat the same mistake again and again.
So inevitably I’ve wanted to know why to fill the gaps in my knowledge. The answers were surprising. They came to me in two key ways as first, both centred around psychology.
To cut a long story short, people view the world through their own ‘filters’ and may not see the same as you. People also find it very hard to change their minds, they prefer to reach a conclusion and look for things to justify that view, dismissing any evidence that contradicts it.
These were the things that finally allowed me to fill the puzzles I saw in the market. I had discovered the joy of cognitive biases and I found more of these over time and deeply expanded my knowledge of them. Suddenly I could see them everywhere in the market, in life and on the field of play in sports. It was a revelation.
If you want to be in the best place you need to have a bit of intellectual intelligence and a bit of emotional intelligence. Too much of either and the biases really become strong.
I’ve faced a lot of prejudice with what I do. But just because you don’t understand something, doesn’t mean that you shouldn’t make the effort to learn why. But in an industry that is renowned for bad behaviour, it doesn’t surprise me any longer when people just don’t get it. But you know what, difference of opinion makes a market and specific biases create additional opportunities in those markets.
I sort of dread the day when the penny drops. But after twenty years, I don’t think it ever will, I could just be onto something here!!!
Putting it all together
I’ve now settled into this pattern of not only trying to work out what the price should be in the market but also trying to work how the market will react to it and it’s a game that I immensely enjoy.
I’ve tried to distil this knowledge into a number of blog posts and videos that give you a good summary of roughly what you should be trying to do. But realise that each person will see this slightly differently and have slightly different approaches and abilities. You know what, that’s what makes a market. I also realise people will pick holes in it. That’s human nature.
But in general, the majority of the market will not be trying to do anything clever and if you just nudge things slightly in your favour. You should be able to gain an edge over the majority of participants. Doing that has worked well for me for two decades and did so again last year.
Last year my best week was roughly £16k. But what about my worst? I didn’t have any losing weeks last year. Of course, results rise and fall depending on the opportunities and you have good and bad moments. But you also need to look at the methodology of what I do and how to understand how I achieve that.
When I first started doing this I worked really hard, as I didn’t know when the opportunity would end. It never did, so I’ve come to realise that I actually have more choice over what I do than I thought. I probably should be taking things a bit easier now, but the passion I had at the start is still there so I still work hard. But I’ve never thought you can completely stop and feel you have it wrapped up.
Despite all I do, I’m not immune to changes in the market either in terms of participants or structure. So I constantly fiddle with strategies, approaches and assessments of markets. Over time I’ve lost my fear of losing my edge as I feel like I understand why they exist and therefore if something shifts, I can adapt.
What I can’t control is the industry and other elements inside or controlling it. If the markets decline for any reason or there are structural changes then that would affect what I do. I don’t worry too much about that as I can’t influence it, so no point in wasting energy on it. But ultimately, things like that impact me more than anything else. That is why I’m surprised at how well I did last year.
But one of the traits I’ve learned to adopt is to be constantly looking out for opportunities as they are everywhere. So whatever you think about the markets, the industry or the prevailing landscape. I’ll always be looking at the things that can take it all forward.
So that’s why I approach each year with renewed optimism.
Who knows what I’ll find over the course of the next year? All I know is that it will be something I’m not thinking about at the moment!