WARNING: This post is NOT written to promote or suggest gambling. Gambling can be addictive. If you have a problem, please find the closest Gamblers Anonymous meeting.
Gambling Vs. Calculated Risk Taking
I’m not into “gambling”. I always thought that buying a lottery ticket was a “bad bet”. I went to Las Vegas many, many times without betting a single cent. I have zero attraction to “flipping a coin” or “pulling a lever” or “rolling the dice” UNLESS I HAVE AN ADVANTAGE. This article is about investment lessons and how to gain the upper hand in any potential investment.
The Joys Of Poker
I always enjoyed poker because of the skill involved. As a teenager, I used to go to my Grand-
Father’s (R.I.P.) place and play poker for nickels and dimes. Unfortunately my grand-mother shut the game down.
In Panama, my friends often play together. I even won a few tournaments (nothing big).
The key is to making money at poker (or any form of investing) is HAVING AN EDGE. That’s why I enjoy poker.
WORLD CLASS VIOLENCE BABY!
I’m not a violent man. Even when I was wasted and training MMA all the time, I never started any fights. BUT… I LOVE mixed martial arts. I love seeing 2 highly trained warriors put it all on the line.
I started training 20 years ago and was watching the UFC from the very beginning when there was no weight class and far less rules. I trained for 7 years and even trained to go fight in a MMA match at the Arnold Classic, but it got canceled. And there was no local MMA circuits for me to compete in so it never happened.
Fast forward today, it’s the fastest growing sport in the world.
Because of my background, I felt I could have an edge betting on the UFC. I knew the fighters and the sport well. I rarely miss any UFC event.
I started wagering FOR FUN on fights about 4 years ago. The bankroll has grown and last year I made over $50,000 profit. I’ll possibly double that this year (knock on wood).
I’m going to share the KEYS to being a successful investor or gambler — because they are the same. The principles are transferable.
What’s amazing is… these principles are applicable in EVERY TYPE OF INVESTMENT.
Investment Principle #1: Develop An Edge
You’re DEAD without an edge. It’s just a matter of time. It doesn’t matter what you’re investing in: stocks, business or sports.
“An edge” means you have something that the majority of your competitors and peers DON’T have. In a hyper-competitive world small edges can make all the difference.
Different types of investments require different edges. The key is to understand and then master the required edge to succeed.
Different Kinds Of Edges:
Blackjack: In blackjack, the edge is purely mathematical. When you count cards and the deck has less high cards, you bet less. And when the deck has a lot of high cards, you bet more.
Poker: In poker, the edges are: being able to read the players and knowing the odds. Poker’s edge is interesting because it’s not PURELY mathematical. A significant part of the edge comes is psychological. Your ability to fool other players and your ability to read other players can make all the difference.
Real Estate: Do you know the market inside and out? Do you understand the real estate cycles? Is the timing good? Is there a bubble? Which neighborhoods are going to be great in a few years from now? Where is the prime areas? If you can’t answer these questions, you probably don’t have an edge.
Stocks: If you’re trading medium or long term, you need to a solid understanding of business fundamentals. If you’re trading short term, then you need to be a master of reading the technicals (price action).
UFC/MMA: The edge is: knowing the fighters… understanding the various aspects of fighting… and your ability to run fight simulations in your head (this is the big one).
Know More Than Most
What it boils down to is KNOW MORE THAN MOST. DEEP knowledge is the key. Some forms of investing, like real estate, are far more forgiving. Others, you have to be in the top 1-2%.
In sports betting, estimates are only 2% make money long term.
In day trading, estimates are only 2% make money long term.
You can’t escape being an EXPERT if you want to be successful.
In the UFC, I’ll watch several fights on each fighter (if I don’t know them) before the fights. I take notes on their strengths and weaknesses. Then I imagine the fight in my head. I think of the most likely way it could go. And then I look if there’s value in the bet.
Investment Principle #2: Only Invest In Value
It doesn’t matter if you’re Warren Buffett, a real estate investor or black jack player — you invest if there’s VALUE. This is where MATH comes in.
Even with an solid edge, you’ll lose if you don’t know how to calculate VALUE (mathematically).
In poker, if there isn’t enough money in the pot based on the odds I have of winning (pod odds) , over time I will lose money.
If I buy great real estate and stocks at the peak of a bubble, I will most likely lose money (when the bubble pops).
How To Bet On UFC – UFC Gambling Tips
Here’s how you calculate VALUE for fighting:
- Calculate the odds of each fighter winning
If the fighters fought 100 times, how many times would each one win? That gives you a percentage.
- Compare your odds to the public’s odds
The public is what eventually sets the sportsbooks lines. If a lot of people bet on a team/player, the odds will shift.
What you’re looking for is differences between the public’s opinion and your opinion. This is the fundamental edge of sports betting. You have to be able to calculate the odds BETTER than the public. If you can’t do this, you won’t win.
That’s how you answer the MOST CRITICAL QUESTION IN INVESTING: “IS THERE VALUE?”
Odds have what is called IMPLIED VALUE.
For an example, if a team is -500 this means they should win 83.3% of the time. If a fighter is +200, he should win 33.3% of the time.
VALUE in sports betting is defined as: a PROFITABLE DIFFERENCE between the public’s perception ( sportsbook odds) and your perception (your odds).
Let’s take for an example a recent blockbuster: Holly Holms vs. Ronda Rousey.
One way to run the fight simulator in your head is, imagine they fought 100 times… how many times would Ronda win? How many times would Holly win?
I calculated the odds at: 65% Ronda Rousey and 35% Holly Holms. Yes, I thought Ronda had a bigger chance than Holly to win, but was it the right bet?
Let’s compare that with the public’s and calculate the VALUE of that bet.
|FIGHTERS||MY ODDS||THE PUBLIC’S ODDS||VALUE|
I knew Holly had a better chance of winning than 12.5% (which is what the odds were). She was a much better striker than Ronda and she trains with the best camp in the world (Greg Jackson).
Plus, Ronda had MASSIVE HYPE behind her (which inflated her odds, which is good as a gambler because it increases value on the other side).
So I calculated the VALUE on Holly was +10% (22.5%-12.5%). I bet a few hundred dollars on Holly and won a few thousand dollars.
Investment Principle #3: Manage Your Risk
Most people’s first question when they find out I made $52K betting on the UFC ask “You must be doing BIG bets?”
My average bet last year was: $200 a bet. Sometimes I’ll bet more if I see MASSIVE VALUE on a bet.
Important Investment Lesson – Never, EVER Bet The Farm
In order to be successful long term, you must MANAGE YOUR RISK.
If you constantly “bet the farm”, you will eventually LOSE THE FARM. It’s guaranteed.
For those of you who are poker players, you know that “going all in” can be a good move in poker. However, it’s SUICIDE (unless you have the nuts) to go ALL IN with your entire bankroll.
One of my buddies, who’s a professional poker player never sits down with more than 2% of his entire bankroll. This means if he busts out, he still has 98% of his bankroll. That’s how he manages risk.
I’ll divide my UFC bankroll into 200 units. I’m usually only betting 0.5% to 1% of my bankroll.
There is a PERFECT MATHEMATICAL FORMULA for calculating how much you should bet or invest. It’s called the “kelly criterion”. You can read more about it here if you want to go deep in the math of it.
The formula uses:
- The expected return
- The probability of success (which also implies the probability of failure)
And it tells you a how much of your bankroll/investment account you should bet. For betting, I recommend doing ¼ kelly (25% of what it recommends) because the volatility at full kelly can be intense.
Investment Principle #4: Manage Your Emotions
If humans were emotionless beings, they would be far better at investing.
One of the greatest investment quotes is from Warren Buffett: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
There’s a reason the majority of investors do the EXACT OPPOSITE and it’s emotions.
When the market is on a massive bull run, the NATURAL UNTRAINED THOUGHT is: “Wow, I better get in on this action! It’s going to the MOON!”
When the market is crashing, the NATURAL UNTRAINED THOUGHT is: “WOW… That’s going down the drain. I’m not touching that with a 20 foot whip”.
So you have to TRAIN your brain to think the opposite and that requires managing your emotions.
Understanding and respecting variance is very important to being a great investor. This will help you manage the emotionality of loss.
In probability and statistics, variance measures how far a set of numbers is spread out.
Here’s a simple example: If 100 people flip a quarter 100 times each. A few of them might have 70 tails and 30 heads — that’s variance. We know that the NORM is 50-50. However, sometimes things go outside the norm.
Here’s another example from poker: I have pocket aces and I’m heads up against KK. The odds of my hand winning is 80%.
However, I lose. Not once, not twice, but 3 TIMES with the same hand. That’s variance. Improbable things are happening all the time.
Over time, the true odds will prevail.
Understanding and respecting variance helps you minimize the emotions that get generated.
What’s Your Pain Tolerance?
Another critical part of the emotions of investing is managing the PAIN OF LOSS. The reality
is every type of investment experiences variance. There’s ups and downs.
Sometimes there’s CRASHES. Sometimes we are just plain wrong. Sometimes we get greedy and over invest. Sometimes, the improbable happens. All of these things can lead to unexpected losses.
How do you handle these?
I’ve had some bad nights and it hurts. I would doubt myself. “Can I really do this?”
Now bad nights happen a lot less frequently and when they do, I know it’s just part of the process.
Your first losses will hurt. However, you’ll toughen up with time.
Surrender The Juice
There’s a lot of JUICE in wagering and investing (I’m not talking about the vig). The juice I’m talking about is the emotional, biochemical experiences.
When we take risks, the neurons in the reward system squirt out a chemical messenger called dopamine, giving us a feeling of satisfaction and encouraging us to make a habit of what we’re doing.
When stimulated by gambling or short-term investing (like day trading), the reward system disperses up to 10 times more dopamine than usual. THAT’S THE JUICE.
To be successful in investing, you have to IGNORE AND MANAGE EMOTIONS and use your mind.
Investment Principle #5: It’s A Long Term Game
It’s normal for us to want EVERYTHING NOW.
However, this time of thinking with investing can make us do BIG mistakes.
Investing is a LONG TERM GAME. You’re gonna make mistakes — guaranteed. It’s going to take you time to develop a true edge — guaranteed. It’s all part of the process.
The key is to consistently COMPOUND your gains over time.
Warren Buffett, the greatest investor the world has ever known, has made approximately 20% a year for the last 50 years and has a net worth of 66 billion.
To put that into perspective, if you invest $10,000 and grow it at 20% a year for 50 years it becomes: $91,004,381.50
As Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Take your time, develop an edge and master the process.
Suggested reading to understand more about these principles:
- More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded) (Columbia Business School
- Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street