Similar to most of the important things one does in life, you need a plan before embarking on a significant activity. Sports investing is no different than when you place your money in other types of investments – – take the time to think through what you want to accomplish and how you are going to do it. In other words, develop a game plan. The key elements of a sports investing plan include:
Establish Your Objective – Of course you want to win! Who doesn’t? Rather, you need to determine the return you desire on the money you place in your Sports Investment Pool (SIP). Whether a person places $500, $250,000 or somewhere in between in his/her SIP (or another type of investment), a goal (percentage return on your investment) over a time period should be set (your Return objective). The percentage return should be realistic, not, for example, doubling your money in the next year. Further, you should realize that the time period on which to focus is long, rather than short, term. Specifically, one should think in terms of years not weeks or months. (I prefer to focus on a 3 year period; however, you may want to select a slightly shorter time frame.) Finally, a secondary objective for most investors is enjoyment. This objective is fine, but it should never eliminate or overwhelm the Return objective.
Risk Tolerance – One must be realistic that there is no sure thing in investing, whether it is through the stock market or sports investing. By utilizing the analysis and recommendations of knowledgeable sports investment professionals like me, one can maximize a return over a period of time; however, the possibility of losses always exists. Thus, the amount of money that an individual places in his/her Sports Investment Pool (SIP) should not endanger the person’s life style (present or future) if there were significant losses. One key action step for any investor is to reassess his/her risk tolerance at least annually, and more frequently if the person’s overall financial condition (not just the level of the SIP) changes significantly (for better or worse) during the year.
Diversification – There are two aspects of diversification: (1) the relationship of your Sports Investment Pool (SIP) to other investments (e.g., stocks, bonds, money market fund, savings accounts and so forth), and (2) determining unit levels. With respect to the first aspect, an individual needs to balance his/her portfolio of investments so that the assets are spread among several different types not concentrated in only one type of investment. You should view your SIP as a longer term investment, not the equivalent of a money market fund or short term bond. This subject has been well addressed by the financial industry, and my only comment is that a SIP should be an integral part of an individual’s total investment portfolio.
In investing on sporting events, it is noteworthy to remember that, over a longer period, no one is going to win all of the time or even a significant majority (say 65%) of the time. This fact is no different than trying to select only stocks that will go up. (In practice, knowledgeable sports handicappers expect to win at a rate between 55% and 60% over the long term.) Therefore, it is critical to establish both the size of one unit and the maximum number of units that will be wagered on any sports pick. One important element in determining the size of one unit for you is the number of sports bets you anticipate making during the coming year – – the more bets, the lower the size of one unit. (This conclusion is based on modeling a SIP with the underlying objective of preserving the initial SIP investment over a period of time, say, one year.) Most sports investors make more than 500 sports picks (gaining significant diversification) over a one year period. At this level of sports picks, I recommend making one unit equal to 2-1/2% of your starting SIP. This amount should not be varied during the year unless you add more funds to your SIP. In this event, increase the size of one unit by 2-1/2% of the newly added amount to your SIP.
Next, you need to determine the maximum amount of units that you will invest on any one sports pick. My philosophy is that a good sports handicapper, based on his knowledge and skill, should distinguish among games and that certain games will be a better investment than others which still are legitimate investments. Using my 5-Star (strongest play), 4-Star and 3-Star ratings as the three levels of classification, a person should assign 1 unit to a 3-Star investment, 1-1/2 units to a 4-Star investment and 2 units to a 5-Star investment.
Therefore, with 1 unit representing 2-1/2% of your initial SIP, the following table expresses, in dollars (rounded), the amount of one 3, 4 or 5-Star investment for several different levels of an initial SIP.
Increasing Your Sports Investment Pool (SIP) – In an ideal world, each one of us would routinely (for example, monthly) place more money in investments, be it a college fund for children, investing for retirement or saving for a rainy day. Since a SIP is an asset to be managed and funded, one should periodically consider adding more money to the pool as part of an investment program. At a minimum, as part of your regular assessment (see Measure Results below), you should determine whether to fund your SIP with more dollars.
Discipline – Stick to your plan and keep emotions and hunches out of your process. Over the course of a season, you will have streaks of losers or, at another time, believe that you cannot miss with your picks. If you are in a losing streak (day, weekend or week), do not chase your recent losses by changing your unit level, increasing the number of units placed on a sports pick, or picking games without understanding why you are selecting one team. This same advice holds true for an “unbelievable” win streak. An investor is focusing on long term, not immediate, results.
Measure Results – No plan and its implementation is complete without measuring the results periodically. Remember not to be overly optimistic during win streaks or disheartened during losing streaks. These steaks will occur, but an individual must continue to focus on the long term return that his/her Sports Investment Pool (SIP) is generating. Each investor should record and summarize the results of each of his/her investments. One simple method is to keep a summary by sport with the pertinent information being number of sports picks, units won and units lost by type of play (5-Star and so forth). Then, an overall summary containing all sports combined, divided among 5-Star and so forth, should be prepared.
Once the information is summarized, an investor should assess the results against his/her Return objective. The assessment also should address what types of sports picks were successful and why, as well as what types of sports picks were unsuccessful and why. Was discipline utilized? Did the investor change the way he/she selected sports picks?
Finally, after assessing the Return on his/her SIP, an investor should step back and consider the return and risks on all of his/her investment portfolio. Then, the individual can rebalance the portfolio by shifting funds among investments, which step could increase or decrease the funds placed in the SIP.
Examples – To look more closely, consider the following example. An investor has an initial SIP of $5,000, a unit size of $125 (2-1/2% of the starting SIP) and anticipates making investments of one unit each (amount risked) on exactly 500 baseball, basketball and football games during a 12 month period at -110 odds. Further, to simplify the calculations, assume the investments are made, and the winning percentage remains, at a constant level over each week of the year. The investor wins 281 games, a very good win percentage of 56.2%. The net units won on the investments are 36.4. (At 11 to 10 odds on each game, 255.7 units were won; 219 units were lost. Thus, the investor’s annual Return on his/her SIP of $5,000 is approximately 63%! (Note that the annual Return of 63% would be identical for any dollar size SIP with the same assumptions utilized in this example.) For those of you interested in the Return calculation, here is how I calculated it. Net units won of 36.4 times $125 (one unit in this example) yields winnings of $4,550. Since the initial SIP was $5,000 and the ending SIP was $9,550, the annual Return equals $4550 divided by the average SIP balance during the year of $7,275.
As another example (without displaying all the calculations), assume the investor in the above example had a significantly lower winning percentage of 53.2%. The annual Return on his/her SIP still would be 17.7%, an annual Return that is higher than can be achieved from most investments and one that almost all of us would be very pleased to achieve on investments in stocks and bonds.