Would You Even Try?

Damon GonzalezInvesting Leave a Comment

Today is the opening day for the NBA. I am looking forward to seeing which young players made the biggest advances in the off season. I wonder if the Milwaukee Bucks or the Philadelphia 76ers are the better team in the East this year. With Kevin Durant on the Nets and Klay Thompson hurt for most/all of the season, the Western Conference is wide open for the first time in years.

My favorite team, the Houston Rockets, reunited Russel Westbrook and James Harden in the off season. Will the two former Thunder players finally have what it takes to win the championship or will I be disappointed once again in June? Could an injury-free Zion Williamson be the next Lebron James?   I think the Mavericks are one player away from being one of the best teams in the league.  Can Kristaps Porzingas stay healthy?  Tonight I will be glued to the Battle for Los Angeles season opener to see which LA team made the better roster changes.  There is so much to look forward to in the 2019-2020 season.  While I love to follow basketball and know more than the average person about the league, I am smart enough to know not to gamble on basketball.

In Wise Investing Made Simple by Larry Swedroe I learned of an incredible study that Raymond D. Sauer conducted when he analyzed the betting lines of six NBA Basketball seasons.  His findings can be found in a paper called The Economics of Wagering Markets in the Journal of Economic Literature.  Sauer’s research found that the average difference between the points spread and the actual score was less than one quarter of a point!  That means if the Houston Rockets are expected to beat the Orlando Magic by 20 points, on average the actual outcome of the game would be something like 120-100.75 or 119.75-100.  Occasionally the lines are way off, but over the course of hundreds of games they are almost psychic!

Have you ever been to a sports book in Nevada?  I have.  It is a bunch of unshaven, beer-bellied men in their 40s who remind me of the Bears fans from the Saturday Night Live Skit Super FansThousands of amateur sports fans listening to talk radio and watching ESPN are creating these sports lines that on average are impossible to beat.  While it is easy to identify the Rockets as the superior team to the Magic, it is extremely difficult to know if the Rockets will win by more or less than the 20 point line any given night.  While anyone can get lucky on a random sports bet or spin of the roulette wheel, casinos know that the more people play, the more the house will win.  To make sports betting even more difficult, the casino charges a 10% vigorish (vig) on your bet.  You have to bet $110 to win $100.  The potent combination of the vig and the efficient market account for why you probably have never met someone who got rich betting on sports.

If sports betting is this efficient, imagine how much more efficient the financial markets are where there is a lot more money, brains, and sophistication sloshing around.  It is common for stocks to move greater than 5% within seconds of key news or earnings news.  High frequency traders, machine learning, and algorithms are working 24 hours a day to exploit any inefficiencies.  See Michael Lewis’ book Flash Boys.  While you might get lucky buying a stock or two on a whim, it extremely difficult to beat the market year after year.  In fact, the 2018 Year End SPIVA Report shows that over the last 15 years, the S&P 500 Index beat 91.62% of large-cap mutual funds that were investing in large U.S. based stocks.  While it is possible to beat the market over long periods of time, it is so difficult that it is not worth trying.

If less than 9% of full-time, professional teams of analysts, resourced with super computers, and millions of dollars can’t beat a passive index, then stock markets are also extremely efficient.  Like many people, I am tempted to take a flyer on an individual stock or bet on a basketball game from time to time, but I restrain myself because I know how bad my odds are.  The more you learn how efficient financial markets and sports gambling are, the more you realize how placing a bet is an exercise of hope over experience (as Larry Swedroe likes to say).  With such low odds of success, the only rational thing to do is build a diversified low-cost portfolio and try to obtain market returns.  I know better than to take the 8 to 1 odds that my Rockets will bring home the championship next June.  I likewise will not be searching for the next super-star portfolio manager that is supposed to be the next Warren Buffet.

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