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« Weekly Update: The ETF Party? | Main | Media Competition: The Erin Burnett Effect »

October 19, 2007

Comments

RB

There is a very clear difference between gambling and investing. While gambling is biased in favor of the house, investing has always produced positive real returns over any 20-year period over the last 80 years.

phyron

I think you're missing the point... and are a bit confused bout the difference tween betting and investing..
a) Obviously there is none
b) When you talk about 35% probability of winning your defacto talking about 65% probability of losing..
c) One man's put is another man's call
d) The basis of most rational investing and risk management.. the Kelly Criterion is explicitly phrased and derived in terms of bets...
e) If you were presented with a series of bets at say 35% and on average you were right 45% of the time you would be the most successful investor in history.
f

VennData

Another excellent post. Some comments:

Eddy E claims the Pats/Fish spread is high and wonders how the handicappers will deal with this.

The problem is 'the line' is 'set' to bring half the money to one side, half to the other. This is not like fundamental investing, but more like day-to-day market makers taking orders: Graham’s voting machine versus a weighing machine.

The ‘line’ or ‘spread’ is distinguished from the odds which want a four to one ratio of money on either side. While a reader with a superficial understanding of odds, Vegas, bookmaking etc. will claim that this is a theoretical difference without a distinction, there is a critically important point: the 4-to-1-type wagers on American football in Nevada usually have a higher vig (vigourish, yiddish for 'fee’) than a standard ‘line’ bet.

Why is this? Is it that they’re newer? Or that the house can ‘fit’ that extra vig in a little easier?

Bettors driving in from SoCal or flying in from the East Coast are used to the line, not odds (nor teasers for that matter and all those “fun” bets on the Super Bowl… big vig..) So while I agree gaming - not gambling - provides a simplified model for investors, my takeaways are as follows:

1) Liquidity effects investing.

Why does EEM have over four times the capitalization of the virtually identical but much... much less expensive VWO? Built in capital gains should mean old holders of EEM do NOT trade. Academics have found a tracking error differences of 45 basis points between EEM and VWO. EEM charges 75 basis points... VWO charge 30... hmm... Spreads vary but are pretty much a penny. Is it because they’re newer like the “odds’ bets on football? Or because the fees are imbedded like the “odds” bets in football?

Also, even though you’re paying that huge 10% vig - paid back if you cover - you can't legally lay off (read hedge) your bet (betting the second half is an independent event.) So that liquidity risk is akin to a subprime mortgage in fall of ‘07... There's just no secondary market…You can't resell your wager.

So why does anyone buy EEM versus VWO? Because they do.

2) Anything can happen.

So you bet the sure thing, you took the Pats to “beat” the Fish giving the points. Imagine how you felt when they pulled Brady? Those poor favorite bettors; they must have freaked out worrying about their seventeen point spread (did they then hope Belichick would revert to form and start stealing signals again?) Then, when they brought Brady back in? Who would have guessed that? End result: The Patriots covered, barely.

3) The most important thing in betting is the vig.

What gaming - sports betting, craps, poker, etc. - taught me was the vig is the crucial element. If you bet all the NFL games on any given Sunday (incl. Thurs – Monday Nite) you’ll win some, you’ll lose some. They’re all 50/50 propositions, except… you pay to play, a lot. Any given weekend of random betting and you’ll lose your vig. So…

Buy VTI, VGK, VPL, VWO and de facto rebalance using VFIFX and you’ll be way ahead of the game in thirty years.... I predict (now, how you allocate among them is a different post.)

4) Finally, when visiting Las Vegas bet against the Dodgers and Trojans. The SoCal money that flows in tends to support their teams, the lines are “set” accordingly.

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