There are two items that need to be mastered before one can become a successful long-term punter. The first is the art of making positive expectation bets. The second is proper money management. Money management will be the topic of this article because many bettors are able to make positive expectation bets without being able to realise a profit. This is an extremely frustrating proposition and is something that I would like to address today.
Generally speaking, your money management system should be able to turn a profit if you are able to pick money winners than losers. I will now examine a few different methods that claim to be able to do so.
The first system is the Martingale system. This advocates doubling up on losing bets to regain losses. There are two fundamental problems with this system. The first is house limits. Even if your bank can sustain a losing run, you will eventually hit the house limit and will not be able to wager sufficient funds to recoup your losses. The second problem is the size of your wagers. If you wager any decent amount, say 1% of your bank, a short losing run will break your bank. If you wager only small amounts, say 0.1% of your bank, your bankroll will survive the losing streak but winning 0.1% is quite a paltry amount.
There are many derivatives of the Martingale system, all of which involve some type of “lose chasing” system. All loss chasing systems will eventually fail. You cannot break the laws of mathematics, but they will certainly break you.
The next system is betting a percentage of your bankroll. This system has you wagering a fixed percentage of your bankroll, recalculating the actual amount bet after each wager. For example, suppose you have a bankroll of $1000 and you are choosing to bet 5%. If your first bet, at $50 is a winner, your next bet works out to be $52.50, or 5% of $1050.
The problem with this system is that you can still end up losing even if you have sound handicapping skills. Consider the case where you are staking 5% of your bank and you pick 101 winners and 100 losers all at even money. It’s quite obvious that a sound money management system would have you ahead. Unfortunately, betting a fixed 5% of your bank, your starting bank of $1000 would end up at $817.48. You’ve lost 20% of your bank even though you should be slightly ahead.
Be careful of those who argue that this system allows you capitalise on a “hot streak” by virtue of a compound interest effect. Yes it’s true that if you go 10-0 you will get the effects of compound interest, the so called eighth wonder of the world. However, when that losing run hits as it inevitably does, your losses are also much bigger than they should be. Similarly they argue that a losing streak does not hurt as badly because each wager is getting smaller and smaller. Once again this is a flawed argument because when you get back to your winning ways, your winning bets are also smaller than they should be.
The next wagering strategy is the very controversial Kelly criterion. This was originally designed for an engineering problem but was later adapted to sports gambling. The basic methodology behind the Kelly criterion is that the size of your wager should be in proportion to your advantage over the house. This type of strategy is popular in blackjack, where skilled counters are able to reasonably approximate their advantage.
Without getting into the mathematics of the Kelly criterion, I would like to outline several of its key features:
- It is a mathematical formula designed to maximise your bankroll over an infinite number of bets
- It is based on an underlying assumption that you are able to accurately calculate your advantage over the house
I would like to address each of these points in turn. Firstly, the Kelly criterion is designed to mathematically maximise your bankroll. Supporters of this staking plan will argue that because you are always betting a percentage of your bank, you can theoretically never lose your entire bankroll. Technically this is true. However, sometimes the Kelly criterion calls for very sizeable wagers, as much as 50% of your bankroll. Even if it is a positive expectation bet, the possibility of losing 50% of your bankroll should cause most punters to be wary. Losing half your bank is a crippling blow and it will take an enormous amount of effort to double your bankroll and get you back to your original capital.
The Kelly criterion also assumes that you can accurately calculate your advantage over the house. Unfortunately, unlike blackjack, it is almost impossible to know how much of an edge you have. The most you can know is that you have some type of advantage, quantifying it is almost impossible. For example, let’s say in a head to head match up you rate TeamA a 70% chance and TeamB a 30% chance. The bookmaker rates TeamA a 50% chance and TeamB a 50% chance. The Kelly criterion demands a large bet be placed on TeamA and you oblige. However, unbeknownst to you the bookmaker has information on TeamA to which you are not privy. Hence in this particular case you have wagered too much on TeamA and if it happens to lose, it will take many bets and a great deal of patience to regain this lost amount. There are numerous other scenarios that can cause you to wager too much and ultimately eat into your potential profits.
A relation to the Kelly criterion is the star system, where plays are rated at 1 star, 2 star, 3 star and so forth. Two star plays are generally twice as big as one star plays, three star players are generally thrice the size of one star plays and so forth. However, if 1 star plays are testing the thresholds of your bankroll, then 2 star and 3 star plays will invariably break it once a losing streak occurs.
There is also a logical fallacy in grading plays at different strengths. For simplicity let’s assume that you have two rankings, 1 star plays and 2 star plays. There are only two possible scenarios for your 1 star plays. Firstly, they’re too weak and not profitable. In this case you should not be making them at all. The second scenario is that they are profitable, in which case if you have played them all at 2 stars, then you would currently have significantly more profit.
The last method is most simplistic yet the most effective. It is the one I recommend. Flat betting involves wagering the same amount on every single game, for example $100. I would like to outline some of the strengths of this system. If you pick 21 winners and 20 losers at even money, you will come out ahead. If you have a really strong bet that loses, your bank will not be dealt a crippling blow. As an example, one time I was wagering on a tennis match where the coach of a certain player told me that the player’s shoulder was injured and would likely affect play. Very excited with this inside info, I proceeded to oppose said player in a wager. Even though I suspected I had a massive advantage, I still wagered only the same amount as usual. This was fortunate for me because the injured player managed to grind out a five set victory. I was now out of pocket by only a small amount instead of losing my house.
The American way of “flat betting” is slightly different from what I advocate. The American system sets prices by using notation such as +154, -105, +423 and so forth. +154 means you wager $100 to make $154 profit. This is the same as $2.54. –105 means you have to wager $105 to win $100. This is approximately odds of $1.95. Americans who flat bet wager a fixed amount on an underdog, say $100. However, on a favourite they will bet to win that fixed amount. So they would wager $105 at odds of –105, $170 at odds of –170 and so forth.
The main difference between the two systems is when you pay for the house edge. When you wager a fixed amount, you “eat juice” (pay the house edge) when you win. As an example let’s suppose you bet Brisbane Lions to beat the point spread at odds of $1.90. If you win, you only receive $90 from a $100 bet whereas if you had made a wager with your neighbour, you would have won $100.
On the other hand if you wager to win a fixed amount, you “eat juice” when you lose. Let’s suppose you want to win $100 and you make a wager on the Brisbane Lions to beat the point spread at odds of –110. If you win, you make a profit of $100, exactly what you would have won from your neighbour. If you lose, you lose $110 whereas your neighbour would have only taken $100 from you. It’s a very subtle difference. My personal preference is for betting the same amount on each wager.
The one caveat I would add to the flat wagering rule is that you should wager the same amount on each bet provided it does not break your bank. Awhile back I was making a tidy sum from betting on golf and tennis. With golf, the idea was to try and pick a winner from an enormous field of players. Some of my bets would be as long as 100/1. In the tennis there are only two players and odds rarely exceeded 5/1. Clearly in this case flat betting would have not been appropriate. If my golf wagers were the same size as my tennis wagers, my bank would have been destroyed a long time ago.
The last question to answer is how much should you actually bet? A conservative approach is to bet 1% of your bankroll. Professional level gambles will generally not bet more than 2%. I would now like to outline a conservative plan that will allow you to increase your bankroll by 50% a year provided you have sufficient handicapping ability.
Let’s assume that you specialise in one or two sports and are able to carefully select three wagers a day. Furthermore, let’s assume that your long term profit on turnover stands at 5%. Wagering 1% per bet, each day you should be turning over roughly 3% of your bankroll. At a 5% profit on turnover, this averages out to be an increase of 0.15% a day. Of course this will not be linear. Your bankroll will fluctuate wildly but over the course of a year, averaging a 0.15% gain per day, your bankroll should increase by 54.8% (365 x 0.15).
This article was intended as a basic primer to money management. Managing your bankroll is very simple. Stake 1% of your bankroll on each wager, never vary the size of your bet and you should be well on the path to profit. Things can get slightly more complicated but for now there is no need to delve too deeply into the topic.
Happy punting to you all!
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Originally posted by Don Nguyen from OnThePunt.com..
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