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Crist Almighty

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7th April 2022

Today on the first day of the Cheltenham Festival I thought it a good time to share an article, by Steve Crist on value investing and finding value in sports betting markets. Whilst Crist, a Harvard graduate and professional gambler focuses on backing winners at the track, this chapter has been hailed by Michael Mauboussin, Professor of Business at Columbia University, as one of the best chapters he's ever read on investing. 

The article speaks for itself, but three key takeaways are:

  1. Seek better outcomes than you pay for.
    Most backers try to find the winner of the race and then back it anyway. The problem with this is that the more people who back a given horse, the lower the pay-out. As Crist explains;
    "The issue is not which horse in the race is the most likely winner, but which horses are offering odds that exceed the actual chance of victory."

    There are very clear parallels in investment markers in recent times. People have been finding and backing the best companies but after a huge run for growth investing at the cost of value investing, it is not obvious where the value is left in growth. Examples of these are Spirax Sarco or Halma, both great businesses but at multiples of 50x post-tax profits, they are arguably no longer good growth investments. 

    As Howard Marks says in the incomparable 'The most important thing', "Investment success doesn't come from buying good things, but rather from buying things well". 
     
  2. You've got to have an edge. 
    Crist states, "Your opportunity for profit at the racetrack consists entirely of mistakes that your competition makes in assessing each horse's probability of winning".
    In investment markets, the whole field of efficient markets talks to the idea that often equally well-informed investors buy and sell from each other. Increasingly there are more investors who have become better informed and better trained over the years, contributing to a more efficient market. 

    About twenty years ago I tried to 'crack' horse racing. Eventually, it struck me that there are niche areas of expertise where you could gain an advantage. All weather tracks, left-handed tracks over short distances and the pedigree of non-handicap races would all be niches that could reward specialisation. Since horse racing wasn't a great interest of mine, I decided to re-double my efforts on the stock market, where I had experience and knew most of the 'runners' and 'riders'. Therefore, despite impressions to the contrary, I have not bet on a horse race for 5 years! 

    Interestingly, although stock markets overall have become more efficient, evidence suggests small and mid-cap markets have become less efficient. 
     
  3. When the odds are in your favour act decisively. 
    If you are lucky enough to find a mis-priced opportunity then you should back it strongly. To quote Warren Buffet, "If it is raining gold, reach for a bucket not a thimble."

    The flip side of this is that if investments are generally priced fairly, then it is difficult to add value as an investment manager. But out performance opportunities do arise, stock market sell-offs provide a background to find these prospects especially when you combine with having an edge. 
     

At this point, I would be doing the investment industry a disservice if I did not point out that investing in the stock market after costs is on average a very positive return experience. Whereas sports betting without an edge delivers negative returns after the bookies margin and taxes. 



Important Information:

This article is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution or retail investors.

Nothing in this article is intended to or should be construed as advice. This article is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Past performance is not a reliable indicator of future results. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions may change if laws and regulations change, and the value of tax relief (if any) will depend upon your individual circumstances.

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