Punting as a long term investment strategy
PERCENTAGE PERFECTION (Part 2)

In last month’s PPM we examined the possibility of adopting a different approach to punting, with the view of racing providing a long term sustainable income.

Punters were asked to entertain the idea of racing income as a viable investment strategy, a strategy that was structured not for the moment, but would afford a steady growth rate over many years. It would be a strategy that could outperform and provide a realistic alternative to the more traditional vehicles like share market and superannuation portfolios.

A new generation of computer savvy punters has transcended much of racing’s social implications and now perceive punting income as a feasible business model. Racing’s emotive issues have been stripped away as strictly business attitudes are endorsed.

It is this mindset accompanied with a structured approach that is providing a very lucrative punting derived income.

If we are going to head down this path and endeavour to replicate some of these successful models, then it has been established that we must be proficient in a number of areas. The two most important are the ability to identify and manage risk and also the capability to consistently obtain value.

Value is somewhat a subjective issue; professional syndicates, however, cannot overstate the importance of finding runners whose odds succeed their calculated probability of winning.

One of the most successful punting syndicates of all time used this approach as the basis of its operation. Computer generated racing selections is nothing new, but when Australian Alan Woods teamed with American Bill Benter who founded computerised betting systems, the use of computers as a form analysis tool was taken to a level of sophistication unheard of before.

After a somewhat roller coaster ride over many years, when the system was finally perfected this duo was netting somewhere in the vicinity of $40 million per annum wagering vast amounts of money on Hong Kong racing.

Such was the impact of their operation that the Royal Hong Kong Jockey Club placed restrictions on certain aspects of their wagering. It was considered that they had an unfair advantage.

Woods and Benter had developed predictive software that rated each race runner in more than 130 different areas; the software then essentially simulated the race before it happened, determining each runner’s likelihood of winning.

Once each horse’s winning probability was calculated, the team then looked for overlays where the odds on offer exceeded the calculated price of each runner.

An overlay can also be described as a runner that has been underbet by the general public resulting in an inflated price.

Each runner had a calculated win expectation, which was obtained by multiplying the horse’s computer calculated probability by its current odds.

E (return) = P (win) x Current Odds.

If the win expectation was less than 1 then this was considered an underlay or poor value. If a horse with a winning probability of 0.25 was paying $2.00 for a win then this would be 0.25 x 2.00 = 0.5 which would represent very poor value.

It doesn’t mean the horse cannot win, just that it has been overbet in the market. If the calculated figure was 1.25 then this is an overlay and would give backers a 25 per cent edge.

All the Woods Benter team have done is framed their own markets, which in this case is expressed in terms of percentages.

This is the core of professional punting success and is a skill that for those wishing to remain in the ball game long term MUST develop. It is all about detection of market inefficiencies, which identifies both overvalued and undervalued bets.

For many the idea of market framing must seem a daunting task. It can be, however, as simple as giving each runner a win rating out of 10 then converting the percentages to odds.

Most odds framers will have some quantitative method of rating runners, where each horse amasses points for performance in a number of designated areas ( fitness, weight, distance, track, etc). Each horse’s individual points are then divided into the total points for the race for a figure, then you subtract one from this figure to get each runner’s calculated price.

A horse who scores 50 points out of a race total of 100 would be rated at 1/1 or even money, 50 goes into 100 twice minus 1 equals 1 or 1/1. There is plenty of information to assist punters in this area on the net; again market framing cannot be understated in terms of importance for any long term profitability objective.

In Part 1 we touched upon an area that would be central to our cause and this was to operate in a statistically friendly environment, wagering on fits in-form horses with proven records at track and distance, etc.

Another vitally important aspect for serious long term punters is the keeping of meticulous records. We need to know at any given point in time precisely where we are financially and if we are on target to achieving any predetermined goals.

At this point we may start thinking of setting up our own punting portfolio. Remembering that our objective is long term and adopting a win small, win often mindset, then the mainstay of the portfolio would be place betting.

Place punting is an aspect of racing that has had more than its share of detractors, however, for those with the ability to achieve a sustainable high strike rate, a beneficial profit line beckons.

Punters should not be deterred by small dividends; an average return of 1.50 per bet can generate surprisingly good margins over a period of time. A 50 per cent return on investment is highly regarded in business investment circles and should hold no less credibility in wagering.

The place component of any portfolio may also be enhanced by the addition of an aggressive staking plan, providing the user can demonstrate a high strike rate.

There are many suitable such plans available from PPM. For those possessing the expertise to also exhibit a high rate of winners is something that cannot be lost to our long term strategy.

Win bet races should be carefully selected where there appear to be only a few genuine winning chances, preferably in races where field size is no greater than 12.

Dutch betting in such instances should be implemented so all genuine winning chances are tied up in target betting. As horses are rated to preset criteria to produce a price or probability figure, so should each race should also be rated to certain criteria to produce a “profitability” figure or index.

Races with large fields and six or more runners in single figures should be avoided as the risk assessment in these cases is clearly too high. No sensible investor would invest their funds all in one company.

The sensible investor will have a portfolio which includes different sectors of the stock market, and so this is what punters should try to mirror here. A place betting and Dutch win portfolio is really all that is needed to meet our objectives. In time, however, some players may wish to include an exotics module into their portfolio.

As touched upon earlier it is essential to keep records to monitor the performance of each division and record the average returns to see if we are meeting our goals.

We may wish to set for instance a 20 per cent return on investment as a target specific, examination of returns will indicate how many winners we will need based on price to achieve our predetermined target.

The table of winners, on page 13, needed per average price stops at 5/1 because we are operating within a preset statistically friendly environment.

A similar type table should also be used for the place component of our portfolio. If we can service our portfolio components at the desired win/place requirements year in year out then we have it made.

Punting on horses can offer far more than the occasional weekend pickup. With a structured and disciplined approach it can provide a very tidy retirement package for those who continue along the path of self-education in racing and the discerning use of available knowledge and information.

Even more importantly winning ways will keep us actively involved in the game we love.

Click here to read Part 1.

By Ken Blake

PRACTICAL PUNTING – APRIL 2006