INVESTING VS SPECULATION - THE ULTIMATE DEBATE

The most important question that arises when investing – and encapsulates the scepticism towards profitable betting – is the difference between investment and speculation. As the great investor Benjamin Graham puts it; “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

By ‘safety of principal’ Graham is referring to the requirement of a margin of safety in a true investment; meaning that its market price is significantly below its intrinsic value (the difference of which being the margin). By ‘satisfactory return’ Graham is refuting ‘Get Rich Quick’ schemes – people chasing above average returns (compared to long-term historic performance) will be bound to end up speculating rather than investing. In the stock market, this could take the form of someone betting on the growth of a company whose name contains a ‘.com’, has no earnings reported and is trading at 1000x its expected future earnings, purely due to the belief that ‘the Internet is the future!’. Such was the case of the Dot-com Bubble at the start of the millennium. To a layperson, since these people were putting their money into the stock market, it was deemed an investment; when it very clearly was not. This is the type of misconception that is currently working in reverse in the sports betting industry – and it must come to an end!

Which Defines Value Betting Then?

Now to relate Graham’s definition to sports betting. This article will not be explaining sharp market efficiency, so have a look at this article if you are still unsure about the concept. The odds at a sharp bookmaker can be considered the ‘intrinsic value’ of a betting contract; and the odds offered at a soft bookmaker can be considered its market price. So, by betting at a soft bookmaker when the corresponding odds are lower at a sharp bookmaker, a bettor is effectively purchasing contracts at prices that are significantly below their intrinsic value, meaning that a margin of safety has been obtained. Also, despite the great success Trademate’s users have had previously, we are by no means promoting our service as a ‘Get Rich Quick’ scheme. None of our customers have expected to win every trade they make and become a millionaire in a week – instead, by following a well-managed staking strategy, over a large enough sample size of bets they have allowed variance to average out and have made a return close to the expected value from the trades placed.

By meeting the criteria set out by one of the most distinguished investors of all time, there is no question that value betting should be considered a legitimate asset class - contrary to its current negative stigma. As that has now been clarified, let’s compare value betting to other mainstream assets classes, and see how it fares...

Stocks vs Property vs Value Betting

Return On Investment:

• Stocks; the average annualised total return for the S&P 500 index over the past 90 years is 9.8 percent. While an individual’s ability to beat the market over the long term is a very contentious topic, unless one is managing a portfolio of a significant amount of money, the amount of time spent trying to beat the market will be inadequately compensated (e.g. if one has £10,000 to invest, beating the market by 2% yields an additional annual income of £200 – but if one has spent a few hours a week to achieve this, this equates to just (£200 / 156 hours) £1.28 per hour.
• Property; only discussing buy-to-let property investing (as this is the most common form of property investment, aside from REITs), the average house price in the UK increased from £150,633 to £231,855 between March 2005 to March 2020, giving a compound annual growth return (CAGR) of 2.91%. The return on capital (ROC) for a BTL property does depend greatly on the size of mortgage used – let’s say for simplicity that with a 30% deposit, a rental yield of 8% is not uncommon. Together, these equate to a rough estimate of a total annual return of 11%.
• Betting; this does depend on many factors, but due to the much higher turnover while betting, a lot of Trademate customers have been able to turn 1k into 2k, for 100% ROC in months – which would take over 7 years in the stock market!

Volatility:

• Stocks; this does depend on the investing strategy implemented, but taking the S&P 500 as a proxy for stock investing, its annualized standard deviation sits at 18.1%. Since this index comprises many high-cap stocks within the United States, it is less volatile than investing in individual companies or investing in emerging markets, for example.
• Property; while rental income is rather steady and reliable over the long term, from 1973 to 2017 the standard deviation of UK house price appreciation is reported to be 2.6%.
• Betting; While it is difficult to provide a figure that represents the volatility of value betting as a whole (as it depends greatly on odds placed, time before kick-off, and individual market liquidity), in the short term it may be more volatile than other assets. However, in the long term, with a large volume of bets and by following the advice in this article, the volatility drops dramatically.

Time / Effort:

• Stocks; if investing passively the time spent is minimal; however, if you are researching stocks and constantly watching over your portfolio it can be quite time consuming, perhaps a few hours a week.
• Property; the process of sourcing and purchasing a property, as well as maintaining it, checking on tenants, collecting rent and then selling the property can be a tedious ordeal. A lot of this can be outsourced which could make this investment vehicle relatively passive, however this may reduce profits.
• Betting; this may be the one downside to value betting, as it does rely on the manual placement of many bets; Trademate customers usually spend at least 10-15 hours a week trading.

Tax:

• Stocks; in the UK profits from selling stocks (above your personal allowance and outside of an ISA) are taxed at 10% if you pay basic income tax, or 20% if you are in a higher tax bracket in the form of capital gains tax.
• Property; in the UK, individual BTL property owners pay stamp duty tax when purchasing a property if it is valued over £150,000, which ranges from 2% up to 12% depending on the price of the property (plus an extra 3% as it is an additional property), as well as council tax, their current income tax rate on rental profits, and capital gains tax of 10% or 20% when they sell the property. A very confusing and costly process indeed!
• Betting; writing from the UK, sports betting profits are not taxed! This is also the same in other countries like Australia, Denmark, Belgium and Italy. Most other countries have either very low tax rates on gambling winnings or taxes for only the people making a living from betting.

To conclude, value betting should start to be given serious credibility as an asset class, and in our opinion it is one of the best! We believe that value betting should be a feature of everyone’s portfolio, especially due to its zero correlation with any other asset. If you think soft bookmaker limitations are the end of road, do not fear - check out the Trademate Pro version. Since Asian markets and exchanges do not restrict accounts, this asset can become a permanent part of your portfolio (although a much higher bankroll and volume is required for these markets, as the edges are smaller). Of course, proper diversification is necessary in any portfolio, so you should consider your current financial status when deciding on your individual asset allocation.