What Traders Can Learn From Professional Horse Betting

Thegreek.com, a horse racing blog, discusses the “seven deadly sins” losing horse bettors commit. Repeat these sins in your trading and you’ll suffer the same fate as the losers at the track.

Here are the four most important sins to avoid:  

Deadly Sin No.1: The most important thing is picking winners.

Wrong! Professional horse bettors will tell you that trying to pick the winner of the race is a failed strategy and that it’s far more important to get value. What’s “value?” Consider this: A horse that you handicap as a legitimate even-money favorite should win about half the time. So that horse is a bad play at 4/5 or less. A horse that you analyze should win about one in four times the race is run, should be about 3/1. That horse won’t win as often as the even money shot but if you can get value, say 5/1 or higher, you’ll make money in the long run.

The few horse bettors good enough to make a living know it’s not about picking a winner. It’s about identifying positive expected value. Oftentimes that means the lower probability play is the better bet.

If an option is currently priced to profit 1 in 10 times, but you think it’ll profit 2 in 10 times, then buy it. It’s a value. It doesn’t matter that most of the time the option will expire worthless. Over the long haul, the buyer will walk away profitable.

Deadly Sin No.3: You should bet more on a horse you really like, such as your “best bet.”

Ridiculous. Why bet if you don’t like who you’re betting? Put another way, any horse worth betting is one worth betting significantly. Sophisticated bettors usually bet about the same amount on every bet. After all, as one professional gambler told me, “If I knew what my ‘best bets’ were I’d only bet those.” A “best bet” is a media creation. If you know what you’re doing, your best bet always should be the next bet you make.

Professional track gamblers understand that bet size is incredibly important. Sizing your bets based on “hunches” leaves you susceptible to accidently betting big on losers and tiny on winners.

Imagine three trades where you’re right on the first two and wrong on the last. And since you thought you had a “hot hand”, you bet really big on that last loser. This would result in the losses from the last trade cancelling out the gains from your first two winners. Your account would end up net negative.

Sizing up has a time and a place in trading. Soros would bet big when the stars aligned. But you need lots of experience before you can start sizing up on what you think are great trades.

Until you’re seasoned and able to decipher between a good and great bet, keep your position sizes consistent. If you don’t, you risk going broke from bad luck.

Deadly Sin No. 4: Statistical betting trends are important.

Actually, they’re not. “Technical handicapping,” as it’s called, is another of those manufactured disciplines used by professional touts, not professional horse racing bettors. Mostly, technical handicapping—wherein statistics are employed to predict an outcome—are little more than “backfitting,” a practice where someone makes up a theory to fit a set of numbers. It’s a lazy handicapping shortcut and no replacement for hard analysis.

Ever wonder why those really smart quants with the fancy degrees end up blowing up? It’s because they have too much trust in a model tightly fit to past data.

Studying the past can help you figure out what’ll happen in the future, but only within reason. If you create a trading model based on the premise that the future will play out exactly like the past… it will fail.

Keep historically based assumptions as simple as possible. That will help thread the needle between useful insight and robustness.

Deadly Sin No. 7: Specialize in certain aspects of the game and pick your spots.

Why limit yourself? If you never bet grass races or stay away from maidens you may be missing some great betting opportunities. When you gamble, having more options always is preferable.

That’s why our team at Macro Ops trades global macro. If stocks dry up, we have the flexibility to drop into the grains market or currencies or any other market where there’s high expected value profit opportunities. The more markets you learn to trade, the easier it is to trade only the most attractive setups.

 

 

What Traders Can Learn From Professional Horse Betting

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

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