A recent ESPN story highlighted a sports gambler who has made some large NBA bets. The problem is they are foolish, irresponsible bets.
The bettor in question likes to bet on NBA favorites to make the playoffs. The odds on this are deeply in the money. Last season, he bet $67,000 on the Warriors at 100-1 to make the playoffs. He was correct. And for being correct, he made $670. That is a 1% return.
Risk vs. Return
Now, a 1% return isn’t necessarily bad. If you are able to make 1%/day, you will get rich very quickly. 1% compounded daily is almost a 40X annual growth in principal.
The problem in this case is the bettor had to wait six months to find out if he was right. So his 1% return is 2% annualized. Not very exciting. There are savings accounts that pay you 2% on cash.
But maybe this guy would rather make his 2% with while having a little fun along the way rather than get monthly bank statements? The problem is he could have been wrong! If he was, he loses 100% of his principal. If the Durant and Klay injuries occurred in November instead of June, this guy would have been sweating bullets for six months!
Even if he believed it was only 1 in 1000 that the Warriors would miss the playoffs, his expected value is only 0.9% (999x he makes $1, the other he loses $100). Yes, it’s positive, but it is still worse than putting the money in the bank. And if the bank disappears, the FDIC will still give him his money back! In other words, he can earn a risk-free return at the bank.
Why would someone take 100% downside to not make any more the risk free rate? Even Catco would have turned down this price for tail risk!
Doubling Down
Yet, America’s Worst Gambler has come back for more! Last week, he put down $100K on Philadelphia to make the playoffs at 50-1 and $10K more on the Bucks at 100-1.
You might say, “he’s learned his lesson this time. He was able to get twice the odds on Philly“. But no, not quite, because he bet three months earlier. That means his 2% profit is earned over nine months, not six, so his annual return is 2.67%. That’s better than the 2% yield on the Warriors, but if you look hard you can still find that rate on a one-year CD (at least before the Fed cut). It also means his Bucks’ bet is only 1.33% annualized.
He is also taking a lot more injury risk than last year. Milwaukee has one dominant star, not four like Golden State had. If he gets seriously hurt, they likely miss the playoffs. The Sixers have more depth than Milwaukee, but their star player has a lengthy injury history. These are not riskless bets.
The Underwriter’s Retort
Oh, and I’m sure there is some underwriter type reading this and about to post a comment about how wrong I am. After all, if I can collect $1 of premium 1000 times and only pay a single $100 loss, I have a 10% loss ratio. This is great stuff!
OK, sure, but you forgot that I have to put $1000 of capital up each time, so I have to commit $100,000 of capital to make my $900 profit. Even if you want to convince me you can get some diversification credit from AM Best and get a cheap line of credit to lower the equity need, you still can’t get to an acceptable return.
Conclusion
Sports gambling is just another form of investing, at least if you’re doing it seriously and not for entertainment value. It can be profitable to vacuum up low-return arbs, but only if you can do it frequently and with cheap leverage (and ideally, with some sort of downside hedge). That is not the case here. This “sharp” clearly doesn’t understand his risk, nor his other options for earning better returns with less downside. Next week, I’ll have a post on how to make high returns with very little risk…