Analyzing a Failed System Part II: Volatility Strikes Out

Volatility has been in the minds of many in the last few weeks as the stock market has seen some extreme movements. In the midst of the fears and uncertainties caused by the coronavirus outbreak, investors have seen a lot of red numbers in their portfolios.

Nobody currently knows how the coronavirus situation will develop, and its financial effects can only be measured in concrete ways later in the year, when companies start releasing their financial statements for the first two quarters.

But what does this have to do with investing in the sports betting market?

High Volatility Means That Your Sports Investment System Is Not Working

With the extreme uncertainty and volatility that the market has been facing recently, it’s no wonder that investors are interested in alternative ways to diversify their portfolios.

The sports betting market offers a great way to do that since it has zero correlation to stocks, bonds, the price of oil, or political developments. In extreme cases like the current pandemic, even professional sports are suspended. But when they return, which they will, the sports investing market will regain shape, unlike the volatile stock market.

To be clear, we’re not saying that you should sell off all your stocks and move that money to a bookmaker’s account. Instead, we’re just pointing out that it makes sense to put your money to work on other fronts as well.

In this article, we’ll explore the concept of volatility in sports investment systems by taking a look at one system we played around with that did not end up meeting our criteria or making our portfolio here at the ScoreMetrics Lab.

A sports investment system that wasn’t meant to be

Like all good sports investment systems, this one started from an initial idea – a hypothesis that we wanted to explore further. In this case, our hypothesis was that ranked teams cover the spread at a high rate early on during a season.

To verify if this was true, we started playing around with some rules for this system and tested how they would have affected our results if we had implemented this system last season.

With the simple rules listed below, we ended up with a 24% ROI for the 2018-2019 season:

  • The opposing team is unranked
  • The team we pick is ranked between 1 and 14
  • The game is played during the regular season
  • The game is played in November

But the problem with such a simple set of rules is that they usually result in extreme inconsistency. We quickly discovered that this was the case with this system as well.

When testing the system further, we included data starting from the 2010-2011 season up until the current season. We backtested what would have happened if we had invested $100 in each qualifying game from that period of time.

The results looked like this:

Season

Record

ROI

Money

2019-20

29-33-0

-9.4%

-$583

2018-19

37-20-2

24%

+$1,415

2017-18

41-19-1

31.7%

+$1,931

2016-17

34-25-0

11.7%

+$693

2015-16

25-28-1

-7.9%

-$425

2014-15

37-19-3

26.4%

+$1,561

2013-14

34-32-3

-1%

-$72

2012-13

32-19-0

21.1%

+$1,078

2011-12

17-19-0

-7.7%

-$277

2010-11

24-26-1

-6.4%

-$325

What we found out is that the theory is wildly correct some years, while in others, it is really not correct at all.

Overall, this system would be up almost $5,000 since the beginning of 2010. But with 561 trades and $56,100 invested over a span of ten years, that $5k profit means that we’d be looking at an 8.9% ROI.

That’s a really weak return for such a long period of time, and on top of that the volatility of this system is really high. Some years would have ended in big wins, but half of the years would have ended in losses. To us here at ScoreMetrics, this looks and sounds like gambling, not solid investing.

Steadier returns

We mentioned the stock market before, so let’s draw some comparisons and talk about volatility.

Now, we understand that it’s impossible to avoid volatility in a stock portfolio during times like these.

But, over longer periods of time, one measure of success for investments in the stock market is how well they’ve performed in relation to risk-free assets. The Sharpe ratio (also known as the reward-to-variability ratio) is the most famous metric for this.

It’s often used to measure the difference in the performance of a portfolio compared to the returns of a risk-free asset, taking into account the volatility of the portfolio. Essentially, it tells whether the investments have been worth the risk that’s been taken.

A portfolio that moves between extremes might look nice on paper during big upswings but might actually be close to as good as investing in low-yield bonds. Or much worse, in the case that volatility results in negative returns.

Similarly, if the returns from your investments in the sports betting market have a lot of volatility between years, the system or systems you’re working with are not very good. It implies that you’re running with a risky approach and your results are based more on luck than sound analysis.

As we pointed out earlier, investing in the sports betting market is not correlated to any other markets. This is a beautiful thing in many ways, one of which is that your returns are not subject to volatility that’s caused by external factors.

That’s why your systems should not produce a bunch of losing years. Those types of systems are definitely not for us here at ScoreMetrics.

Hopefully that drove our point home!

To learn how to build solid sports investment systems that are not subject to great volatility, we’ve got you covered with our very own John Todora’s new book – “Zero Correlation Investing – The Score Metrics Secret”. It is currently on sale for a limited time, so now’s an excellent time to go grab a copy and start getting exposure to this wonderful market.

Everyone here at the ScoreMetrics Lab hopes that the coronavirus situation gets under control ASAP. Stay safe and stay invested in sports!

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