Speaker 1: Good afternoon. You're listening to Gambling with an Edge.
Speaker 2: Now Here are your hosts, Bob Dancer and Richard Munchkin.
Speaker 3: Good afternoon, Welcome to Gambling with an Edge on Bob
Speaker 3: Dancer and I'm Richard Munchkin.
Speaker 2: Our guest today is poker player and sports better Dan Abrams,
Speaker 2: who has written a new book entitled Sharp Money. Dan Abrams,
Speaker 2: Welcome to Gambling with an Edge.
Speaker 1: Thank you, thanks for having me by training.
Speaker 2: You're an engineer. How did you get started playing poker?
Speaker 1: Well, like a lot of people in America, when the
Speaker 1: World Series of Poker started being broadcast on ESPN in
Speaker 1: two thousand and three. That was the year that Chris
Speaker 1: Moneymaker won the main event, and it became a very
Speaker 1: very big deal because he won an online satellite to
Speaker 1: even get into the main event, and then he wound
Speaker 1: up winning and it became really riveting television, and they
Speaker 1: would put it on after you know, Sunday night baseball
Speaker 1: or whatever games they had going. So I really kind
Speaker 1: of got interested that way. I had played poker just
Speaker 1: for fun with my friends even as young as elementary school,
Speaker 1: but never really played it for money before. And then
Speaker 1: you know, when when some guy wins two and a
Speaker 1: half million dollars playing poker. It piques a lot of
Speaker 1: people's interest.
Speaker 3: So you're really known for RAZ, and you did a
Speaker 3: lot of teaching of RAZ, and so can you explain
Speaker 3: sort of how that evolution happened.
Speaker 1: Yeah, So the most popular game obviously was no Limit
Speaker 1: Hold Them, but most of the online sites would spread
Speaker 1: other types of games, including seven Card Stud, which I
Speaker 1: was familiar with from playing as a kid and as
Speaker 1: a teenager. So I started playing that for a while
Speaker 1: and I got pretty good at that, and I had
Speaker 1: seen RAS covered on TV and I understood a little
Speaker 1: bit about it, but I was primarily concentrating on STUD.
Speaker 1: And then I went through a period of several days
Speaker 1: where I couldn't even get a decent starting hand, and
Speaker 1: if I did, you know, if I got something like
Speaker 1: split jacks, somebody with a king would raise and then
Speaker 1: an ace would re raise him and I'd have to fold.
Speaker 1: And I thought, well, let me give this RAZ game
Speaker 1: a try, because the starting hands I tend to get
Speaker 1: seemed to be much better for RAS than they are
Speaker 1: for STUD. And I just started at the lowest possible stakes,
Speaker 1: really to get my feet wet, and I found out
Speaker 1: that there weren't a whole lot of good players at
Speaker 1: those stakes on like No Limit Hold Them, where you
Speaker 1: could multi table so easily, that the good players would
Speaker 1: play at the low stakes, but they would play like
Speaker 1: twelve or sixteen tables at a time, and that's how
Speaker 1: they would win money.
Speaker 3: And what was it about REZ that drew you to
Speaker 3: it other than the fact that usually it's not where
Speaker 3: all the sharpest people are when you know, kind of
Speaker 3: go away from the mainstream.
Speaker 1: Yeah, exactly. And what you could do on the online
Speaker 1: sites is you could keep track of players that you
Speaker 1: had played before. You could take notes on them or
Speaker 1: assign like a color code to them. And I found
Speaker 1: that a lot of the players that I was going
Speaker 1: up against in RAZ that were really bad at it,
Speaker 1: I had notes on them as being very good No
Speaker 1: Limit Hold Them players, And I began to realize that
Speaker 1: it's really very much the opposite of No Limit Hold
Speaker 1: Them in so many ways that the people who were
Speaker 1: trying it and trying to play the same way they
Speaker 1: played in the Limit Hold Them were really really bad.
Speaker 1: So I really got interested that way and started to
Speaker 1: do a little bit of studying of the game, and
Speaker 1: there really wasn't much. There was not There was only
Speaker 1: really one book that had was completely about Raz and
Speaker 1: that was Sklansky on Poker by David Splansky. So I
Speaker 1: got that and I read it and I was making
Speaker 1: all sorts of notes, trying to study it like a textbook,
Speaker 1: and he does like example hands at the end of
Speaker 1: the book, and for one of them, he said, in
Speaker 1: this situation, you should fold unless there's a lot of
Speaker 1: money in the pot. And I thought, oh, geez, well,
Speaker 1: I don't know how much a lot of money is
Speaker 1: to him, right, So I tried to figure it out
Speaker 1: on my own to see it kind of solve it backwards,
Speaker 1: to see how much money there would need to be
Speaker 1: in the pot to make it worth calling in that
Speaker 1: situation rather than fold. And what I came up with
Speaker 1: was that it was really a very small amount of
Speaker 1: money to be in the pot at that point in
Speaker 1: the hand. And so I was like, huh, maybe there's
Speaker 1: there's room to investigate Raz here that' Sklansky hadn't really covered.
Speaker 1: And that's what really got me rolling.
Speaker 2: You said you switched games because you were card dead,
Speaker 2: which is a type of betting a trend, reasoning that
Speaker 2: you're now strongly opposed to as an investor. Now you're
Speaker 2: very much an expert investor now, but when you but
Speaker 2: using that reasoning for starting RAS seem like a very
Speaker 2: ploppy move.
Speaker 1: Is that fair? Oh yeah, it's very fair. I mean
Speaker 1: I've made all sorts of mistakes in when I started investing,
Speaker 1: when I started playing poker. You know, the same type
Speaker 1: of thoughts that most people are thinking when they do that.
Speaker 1: I just managed to analyze them a little bit and
Speaker 1: overcome those mistakes.
Speaker 3: So how did the You obviously went from begin a
Speaker 3: RES player to one of the top RES players out
Speaker 3: there and became kind of a teacher at a site
Speaker 3: that people tended to really flock to to learn more
Speaker 3: about RES. How did that come about?
Speaker 1: Well, it's kind of a roundabout story, which I tell
Speaker 1: in the book, is that I was looking to do
Speaker 1: some one on one poker coaching for RAZ, specifically because
Speaker 1: I noticed that at stakes above the level that I
Speaker 1: was bankrolled to play, there would be a lot of
Speaker 1: players who really didn't know what they were doing at
Speaker 1: RAZ at all. They were just hunting away money. And
Speaker 1: I thought, well, if I can get a few of
Speaker 1: these guys to be interested in one on one coaching
Speaker 1: to make a little money on the side doing that,
Speaker 1: So I was looking for perspective students, and I had
Speaker 1: had the occasion to be looking at the forums on
Speaker 1: two plus two if you If you recall, two plus
Speaker 1: two Publishing has a huge set of forums that were
Speaker 1: very very popular back in the day, and they had
Speaker 1: a couple of hands that were played by one of
Speaker 1: the top no limit hold'em tournament players and they they
Speaker 1: had they could show the hand history, and they were
Speaker 1: they were really played badly. So I looked up the
Speaker 1: guy's profile and he had his email address in the profile.
Speaker 1: So I sent him an email and I said, hey, look,
Speaker 1: I'm a RAZ specialist. I play the game almost exclusively.
Speaker 1: I've done all this research and if you would be interested,
Speaker 1: I would like to coach you. And I basically gave him,
Speaker 1: like some some free example hands to take a look
Speaker 1: at to see what he thought. It ended up he
Speaker 1: didn't and he didn't wind up taking me on as
Speaker 1: a coach, But later on he apparently talked to some
Speaker 1: of his friends about it, and they were starting up
Speaker 1: a poker training site, so they reached out to me
Speaker 1: and said, would you be interested in making videos on RAZ?
Speaker 1: And so that's how I got that gig.
Speaker 3: Are those videos still out there?
Speaker 1: No, actually they're not. They had a that site ended
Speaker 1: up being bought by card Runners, which was a much
Speaker 1: bigger site, and I eventually made some videos for card Runners.
Speaker 1: So actually, if you look on YouTube, you can see
Speaker 1: some of the snippets that card Runners would put out
Speaker 1: as like, you know, five minute trailer of my videos.
Speaker 1: There's still a few of those on YouTube if you
Speaker 1: look them up.
Speaker 3: Can can you still find RAS games? Are there? I
Speaker 3: assume there's a RAS tournament in the World Series.
Speaker 1: Yeah. The World Series now has two RAZ tournaments every year,
Speaker 1: and of course they have mixed game tournaments. It's probably
Speaker 1: about seven or eight of them each year that include RAZ.
Speaker 1: It's part of like a horse game or an eight
Speaker 1: game mix and that sort of thing. And they have
Speaker 1: there's some sites online sites that will feature RAZ still,
Speaker 1: but mostly in the US. You can only play in
Speaker 1: certain states unless you use crypto sites. So the crypto
Speaker 1: site called Fena that still has RAS and they get
Speaker 1: RAZ games going occasionally.
Speaker 3: Are you still actively playing or no?
Speaker 1: Yeah? At this point, you know, just every once in
Speaker 1: a while. I think the games are so sporadic but
Speaker 1: I will play when they're available.
Speaker 2: Now it's it's well known that a number of very
Speaker 2: successful poker players have lost a ton of money betting sports. Yeah,
Speaker 2: didn't that give you pause before you went that route?
Speaker 2: And how did you assume your journey would be different
Speaker 2: than theirs?
Speaker 1: It gave me a lot of pause, you know. I
Speaker 1: started playing poker probably the end of two thousand and three,
Speaker 1: and and I didn't start betting sports until twenty twenty.
Speaker 1: And I really never intended to bet sports at all,
Speaker 1: because I'd heard from several people that that's the best
Speaker 1: way for a poker player, a good poker player to
Speaker 1: lose money, to start betting sports. But they had a
Speaker 1: site in Pennsylvania where I lived at the time, which
Speaker 1: was Poker Stars for Poker, But then they also had
Speaker 1: a section for sports betting through Fox Bet, and so
Speaker 1: they would send promotions to me all the time, saying,
Speaker 1: you know, here's an odds boost or a free bet
Speaker 1: or whatever to try to get me interested in sports betting.
Speaker 1: So I reached out to my friend Eric, who I
Speaker 1: had played poker with for years, and he had started
Speaker 1: sports betting, and I sought out his advice and started playing.
Speaker 3: Through that, and are you still doing that?
Speaker 1: Yes, I mean Fox bet is no more they shut down,
Speaker 1: but I'm still actively sports betting and you still doing
Speaker 1: well with that.
Speaker 3: So one of the things that really caught my eye
Speaker 3: in the book was your discussion about why it may
Speaker 3: be a good thing to over bet your bankroll when
Speaker 3: you're starting out and have a small bankroll. So you
Speaker 3: can we talk about that.
Speaker 1: Yeah, sure, that's the sort of thing that is actually
Speaker 1: being talked about in financial circles by a lot of
Speaker 1: academics because, you know, they want to guide people in
Speaker 1: how to construct the portfolio, and you know, you want
Speaker 1: to have a certain amount of risk associated with your portfolio,
Speaker 1: but not too much risk because you know you want
Speaker 1: to protect it. Same thing with your bankroll. But they
Speaker 1: realize that the amount of money you have in your
Speaker 1: portfolio now doesn't represent the whole story. You have to
Speaker 1: take into account how much future earnings you're going to have.
Speaker 1: So somebody close to retirement should be a lot more
Speaker 1: conservative with their bankroll or their portfolio then somebody in
Speaker 1: their twenties or thirties should be. And they actually did
Speaker 1: a lot of very complicated academic research to prove this
Speaker 1: point and so I said, well, the same thing can
Speaker 1: apply equally well to sports betting. I mean, when you
Speaker 1: have when you're at a professional level and you have
Speaker 1: a bankroll, say in the millions, are close to it,
Speaker 1: that's very hard to replace. But if you're doing it
Speaker 1: on the side where you're earning an income from a
Speaker 1: job and you're using a certain amount set size as
Speaker 1: your bankroll, if you have to, if you go bust
Speaker 1: on that bankroll and you have to replenish it, and
Speaker 1: say you take three or four months to replenish it,
Speaker 1: that's not a disaster. You take a break, but you're
Speaker 1: not out of the game. And the whole idea of
Speaker 1: protecting your bank roll is if you lose your whole bankroll,
Speaker 1: you're out of the game. You can't bet anymore, and
Speaker 1: you can't take advantage of your edge anymore at that point.
Speaker 1: So it's really and it was the sort of thing
Speaker 1: in poker that was very, very common and probably still
Speaker 1: is for the younger players where they would take shots
Speaker 1: at higher levels and I did as well, you know
Speaker 1: when I was starting out. You know, they'll they'll take
Speaker 1: set aside, maybe twenty percent of their bank roll and say, okay,
Speaker 1: I'm going to go up a couple of levels and
Speaker 1: see if I can beat them. And if they can,
Speaker 1: they stay at those levels and can earn a lot
Speaker 1: more per hour. They don't, you know, they lose twenty
Speaker 1: percent of their bank roll. They step back down and
Speaker 1: they start grinding it back up, but they're at the
Speaker 1: regular stakes.
Speaker 2: Yeah.
Speaker 3: I remember when I was starting out, I knew one
Speaker 3: blackjack player in particular who had a ten thousand dollars
Speaker 3: bank roll and he was out betting two hands of
Speaker 3: five hundred and I thought he was absolutely insane. But
Speaker 3: you know, he happened to run well, and he ran
Speaker 3: it up to one hundred K. And and I don't know,
Speaker 3: I mean, he didn't have a job at the time.
Speaker 3: You know, that was what he was planning to do.
Speaker 3: But you know, I guess in retrospect, well, yeah, if
Speaker 3: he lost it, well he could go back and get
Speaker 3: a job and build up a bankroll and start over.
Speaker 3: But it was certainly more risk than I was willing
Speaker 3: to take.
Speaker 2: Yeah, I when I talked a similar point in my
Speaker 2: video poker classes, I would make the point that when
Speaker 2: you're twenty five and you'd go broke, it's not a
Speaker 2: good thing. But when you're seventy and go broke as
Speaker 2: a disaster, And so when you're starting out you have
Speaker 2: so many more options of ways to get the money back,
Speaker 2: and when you're seventy, your best money making options are over.
Speaker 2: So I did it in terms of age rather than wealth,
Speaker 2: But it's a simil principle, I think.
Speaker 3: Well, I think also about when you're twenty five, or
Speaker 3: when I was twenty five, my lifestyle was pretty spartan.
Speaker 3: I would never stay in a motel better than Motel
Speaker 3: six or whatever was the cheapest possible thing I could find.
Speaker 2: But you know, you reach.
Speaker 3: A certain point in your life where I'm not going
Speaker 3: to stay in Motel six anymore, you know what I mean,
Speaker 3: Like you're used to more comforts as you get older
Speaker 3: and your bankroll grows, and so yeah, I totally agree
Speaker 3: with you that there's a big difference going growth later.
Speaker 1: Yeah. Absolutely. And you know when I was in my twenties,
Speaker 1: I stayed at Motel five and a half. I mean
Speaker 1: I couldn't emplord Motel six. So I know where you're
Speaker 1: coming from.
Speaker 2: Yeah. Now, when you were in sports betting, you developed
Speaker 2: a theory of increasing expected growth as a better theory
Speaker 2: then increasing expected value. So how did that work in
Speaker 2: sports and does that go well with investing in other things?
Speaker 1: Well, in sports, really, you know your end goal is
Speaker 1: to increase the size of your bank roll, and the
Speaker 1: first step to doing that is finding positive expected value
Speaker 1: opportunities that are going to lead to winning more in
Speaker 1: the long term than you lose. But that the expected
Speaker 1: value of a bet or a play doesn't take into
Speaker 1: account the level of risk you have to endure. That's
Speaker 1: why there is such a thing as the Kelly criterion.
Speaker 1: Cally criterion says, Okay, if you have positive expected value,
Speaker 1: here's the optimal amount to stake on that bet, maybe
Speaker 1: one percent, three percent, five percent of your bank roll.
Speaker 1: But why is there an optimal amount? Why isn't ten
Speaker 1: percent of your bankroll better? A twenty percent of your
Speaker 1: bankroll better? Well, in terms of expected value, the most
Speaker 1: expected value you're going to get in terms of absolute
Speaker 1: dollars is if you find a big edge, you put
Speaker 1: one hundred percent of your bank roll on it, and
Speaker 1: that's the most expected value you can get. And obviously
Speaker 1: it only takes or one or two times or one
Speaker 1: time losing with one hundred percent of your bankroll on
Speaker 1: a play that you go bust and then you can't
Speaker 1: take advantage of any more plus EV opportunities. So the
Speaker 1: idea that you want to increase your expected bank roll
Speaker 1: actually takes into account the amount of risk that you're
Speaker 1: taking and balances it with the positive ev that you
Speaker 1: can get based on your edge. The same I didn't
Speaker 1: know it at the time when I first started looking
Speaker 1: into it, but the same principle exists in investing. It
Speaker 1: just goes by a different name called risk adjusted returns.
Speaker 1: So you can expect to get a certain return from
Speaker 1: like a mutual fund, a stock mutual fund, and say
Speaker 1: it's ten percent a year is your expected return. If
Speaker 1: that's coming from a stock mutual fund that it mostly has,
Speaker 1: you know, very large cap stocks and it doesn't move
Speaker 1: around very much from year to year, that may be
Speaker 1: a very good investment to put a lot of money in.
Speaker 1: Whereas another fund that also has ten percent expected returns
Speaker 1: per year but uses you know, micro like penny stocks
Speaker 1: that have huge volatility from year to year, that may
Speaker 1: not be a very good investment because you're not getting
Speaker 1: any more return for the risks that you have to bear.
Speaker 1: And it's really when you do the math. The math
Speaker 1: is identical in both situations.
Speaker 3: Yeah, I think that. You know, the thing that people
Speaker 3: miss about Bett and Kelly is the variance part of
Speaker 3: the equation. Right, there's a big difference between if you're
Speaker 3: playing blackjack with a one percent edge, but your variance
Speaker 3: is only one point one. That's a big difference than
Speaker 3: having a one percent edge on a slot machine, where
Speaker 3: your variance might be you know, two hundred or something.
Speaker 1: Oh absolutely, yes, that's really the key point is that
Speaker 1: you have to account for both, and the variance is
Speaker 1: going to hurt just about everybody. It's going there's gonna
Speaker 1: be one person that's really lucky. You know, you find
Speaker 1: one hundred people playing the slot machines, and one of
Speaker 1: them is going to be really lucky and take home
Speaker 1: a huge payday. The other ninety nine are not, And
Speaker 1: so if you're not the luckiest of the bunch, the
Speaker 1: variance is going to hurt you a lot more than
Speaker 1: it helps.
Speaker 2: Well, one thing about Kelly and sports betting is if
Speaker 2: you can if you're if your formula says you should bet,
Speaker 2: however many dollars, you often can't get that many dollars down.
Speaker 2: You might be limited by by either the book's that big,
Speaker 2: or they can limit you personally to you can bet
Speaker 2: any amount you want up to ninety nine cents.
Speaker 3: Does that get I remember when Elihu was on the
Speaker 3: show and he said, at some point, Kelly just doesn't
Speaker 3: matter anymore because, basically because of the limits, once your
Speaker 3: bank roll is big enough, you you could never bet
Speaker 3: as much as you wanted because the sports books just
Speaker 3: won't take it.
Speaker 1: Yes, that's that's very true. And you know that most
Speaker 1: of the recreational sports books do a pretty good job
Speaker 1: of figuring out who's sharp and who's not and limiting
Speaker 1: them specifically, like Bob was talking about. But even beyond that,
Speaker 1: you know that they have limits that everybody has to
Speaker 1: adhere to. They're just not willing to take whatever you
Speaker 1: want to plunk down. So that is a big factor.
Speaker 1: And when you get to the point where you have
Speaker 1: a very large bank roll, then Kelly doesn't really come
Speaker 1: into play because you're just not able to get down
Speaker 1: as much as you want. But it's very interesting when
Speaker 1: I've watched or listened to a lot of professional sports
Speaker 1: betters talk about how they got their start and what
Speaker 1: they do now. A lot of them get their start
Speaker 1: by doing arbitrage betting or middling where you'll bet on
Speaker 1: both sides of the game at different spreads, and if
Speaker 1: the spread, if the game difference falls just right, you
Speaker 1: win both bets. But most of the time you win one,
Speaker 1: you lose one. That's how they got their start, and
Speaker 1: those are much lower risk type of plays than just
Speaker 1: betting on positive ev bets. And they built up their
Speaker 1: bank rolls that way, and then when their bank rolls
Speaker 1: got to be so big that they couldn't get down
Speaker 1: as much as they wanted to anymore, the light bulb
Speaker 1: went off and they said, Hey, why am I arbitrage
Speaker 1: betting when I've got value on one side and I'm
Speaker 1: losing value on the other side. Why don't I just
Speaker 1: bet the side that only has value. Well, that's exactly
Speaker 1: the point in time when you should make that switch,
Speaker 1: when you can't get that as much as you want
Speaker 1: to anymore, So you just bet the value side. You
Speaker 1: don't have to worry about Kelly criterion because you're never
Speaker 1: going to get that much down.
Speaker 3: Yeah.
Speaker 2: So arbing is a form of hedging your bets. Are
Speaker 2: there in the financial markets or is it right to
Speaker 2: headge your bets?
Speaker 1: Sometimes it certainly is, But it's a lot harder to do.
Speaker 1: You know, back in like the sixties and the seventies,
Speaker 1: and people like Ed Thorpe were starting with hedge funds.
Speaker 1: That's what they did is they would find mispriced options
Speaker 1: and they would load up on them, and then to
Speaker 1: reduce their risk, they would either buy or short sell
Speaker 1: the underlying stock, figuring that that was a pretty efficient market.
Speaker 1: They might lose a tiny little bit of value on
Speaker 1: the stock side, but they would make a ton of
Speaker 1: value on the option side, and the risk would even out.
Speaker 1: And that was very successful for a while until in
Speaker 1: the nineteen seventies the Black Shoals formula got published and
Speaker 1: then everybody could figure out how to value options correctly,
Speaker 1: and that became much harder to do. So it's actually
Speaker 1: a lot easier to do a true arbitrage in sports
Speaker 1: betting than it is in investing, because in investing, you know,
Speaker 1: when you go to buy a particular stock, there's only
Speaker 1: one place to buy it, right it's either listed on
Speaker 1: the New York socc Exchange or on the Nasdaq. And
Speaker 1: in sports betting there's so many different books to choose from,
Speaker 1: so you can can often find odds of one book
Speaker 1: that are really good on team A. Another book, they're
Speaker 1: really good on team B, and then you can form
Speaker 1: an arbitrage that way.
Speaker 3: So the one thing that seemed to be not talked
Speaker 3: about much was the whole tax implications of you know,
Speaker 3: when you talked about rebalancing your portfolio, Well, there's a
Speaker 3: huge cost if you're in a regular brokerage account. There's
Speaker 3: a huge cost to rebalancing if you have a gain
Speaker 3: on something that you now want to take your position
Speaker 3: down to a lower amount.
Speaker 1: Yeah, you're absolutely right, And you know, I'm not a
Speaker 1: tax professional, so I steered clear of trying to give
Speaker 1: any sort of tax advice in the book. But you're
Speaker 1: absolutely right, and that type of technique is going to
Speaker 1: work much better in a tax advantage account like an
Speaker 1: IRA or a four oh one K, as long as
Speaker 1: you don't have any you know, high transaction costs in those.
Speaker 1: And it's the kind of thing that could also work
Speaker 1: in an ETF. They're they're already loads of ETFs that
Speaker 1: are set up to do you know, two times leverage
Speaker 1: or three times leverage of some sort of index like
Speaker 1: the either the Nasdaq or the S and P five hundred,
Speaker 1: or even of individual stocks and they're trading every single
Speaker 1: day in order to reset that leverage because you know,
Speaker 1: the as the stock or the or the index goes
Speaker 1: up and down, the amount that they need to hold
Speaker 1: of the underlying stocks versus the swaps that they use
Speaker 1: to get the leverage changes every day, so they have
Speaker 1: to reapback balance every day. Now, they're not turning over
Speaker 1: the whole portfolio, they're only trading a little bit, but
Speaker 1: they're doing it every day. And the type of rebalancing
Speaker 1: that I was modeling is the same sort of thing
Speaker 1: where you're not turning over the entire portfolio. We're trading
Speaker 1: a little bit every day to essentially adjust the leverage
Speaker 1: that you have based on the market conditions.
Speaker 3: Yeah. I was faced with this situation a couple of
Speaker 3: months ago where I had, you know, a bunch of
Speaker 3: silver which had exploded, and because some of it was
Speaker 3: in a broker not a taxible brokerage account, you know, I,
Speaker 3: you know, I wanted to rebalance, but I was not
Speaker 3: willing to pay the capital gains tax to do it.
Speaker 3: And you know, I knew that I could buy puts,
Speaker 3: which is basically an option that is like a beat
Speaker 3: that silver will go down, but if I do that
Speaker 3: and I'm correct, well then I have to pay the
Speaker 3: tax on the put, which is now a short term
Speaker 3: capital gain, which is even worse. Right, So yeah, it's
Speaker 3: it's it's very difficult to do those things in taxable accounts,
Speaker 3: which so basically, you know, I followed ed Thorpe and
Speaker 3: Wren Buffett's advice to you know, just buy the index
Speaker 3: and let it sit there.
Speaker 1: Yeah, I mean for taxable accounts, you absolutely have to
Speaker 1: take that into account. And and and when you're doing
Speaker 1: it yourself like that, passive investing has a lot of advantages.
Speaker 2: Yeah, in your earlier writings on sports betting, you used
Speaker 2: a route unit staking system.
Speaker 1: So what is that?
Speaker 2: And does that have an analog in the investing in
Speaker 2: other things world?
Speaker 1: So that's a staking system where you decide how much
Speaker 1: you're going to bet based on the difference in odds
Speaker 1: from basically an even money bet, and so you take
Speaker 1: the square root of that difference and you divide your
Speaker 1: bet by that amount. In other words, if you're if
Speaker 1: you're normally betting, say one hundred dollars at even money,
Speaker 1: and then you find a bet at plus four hundred,
Speaker 1: so it's four to one odds, you would divide your
Speaker 1: bet size by the square root of four, which is two,
Speaker 1: so you would bet fifty dollars on that. Conversely, if
Speaker 1: you're going to bet at something at minus four hundred,
Speaker 1: you would divide by the square root of one quarter,
Speaker 1: so dividing by a half, multiplying by two, you would
Speaker 1: bet two hundred dollars. And essentially the way it works
Speaker 1: is that if you're in a type of market where
Speaker 1: you have a pretty good idea of what your edge
Speaker 1: is at even money bets, but you're not sure how
Speaker 1: much the edge will change for bets at different odds,
Speaker 1: if you follow this system, you're essentially mimicking what the
Speaker 1: Kelly criteria would tell you to bet based on those odds,
Speaker 1: because normally you'll find a bigger edge at the plus
Speaker 1: money odds and a smaller edge for the minus money odds.
Speaker 3: You know, a mistake that I a lot of gamblers make,
Speaker 3: or people who are even our professional gamblers, is they
Speaker 3: do not want to lay a big price. They you know,
Speaker 3: they really hate the idea of, you know, laying eight
Speaker 3: to one on something because if I lose, I lose eight,
Speaker 3: but if I win, I only win one. But what
Speaker 3: they're forgetting is you're supposed to win seven out of
Speaker 3: eight times when you do that, So yes, you are
Speaker 3: losing the eight when you lose, but seven or eight
Speaker 3: times you're winning one. So yeah, it's just interesting that
Speaker 3: even people who are professionals who should understand these things,
Speaker 3: it's hard to not let your emotions take over with
Speaker 3: those decisions.
Speaker 1: Yeah, it really is, because you know, our intuition gets
Speaker 1: built up from other experiences, and then it just feels wrong.
Speaker 1: It feels wrong to risk that much money, even though,
Speaker 1: like you said, you're going to win seven out of
Speaker 1: eight times. So occasionally you will lose and it will
Speaker 1: really hurt, but you know you're going to rebound because
Speaker 1: you know you keep doing it. You win seven out
Speaker 1: of eight times, and when you look at it from
Speaker 1: the lens of expected growth or risk adjusted returns, because
Speaker 1: those kind of vets have much lower risk, right, you're
Speaker 1: only going to lose one out of eight times. If
Speaker 1: you can get the same edge that you could add
Speaker 1: for an even money bet, those kind of minus eight
Speaker 1: hundred bets are way more valuable. You will build your
Speaker 1: bank roll much quicker with those kind of bets, and
Speaker 1: because of that, you usually don't see that big of
Speaker 1: an edge when it's at minus eight hundred. As a
Speaker 1: matter of fact, that you know, there's a certain limit
Speaker 1: to how big the edge could possibly be, right, because
Speaker 1: you could only you can only win one hundred percent
Speaker 1: of the time. You can't win more than more than that.
Speaker 1: But I actually did an article for Pinnacle a couple
Speaker 1: of months ago talking about that exact subject, where there
Speaker 1: was a betting service basically that kind of broke down
Speaker 1: the profit that they made on their sharp bets by
Speaker 1: what the odds were. They put them in certain groups,
Speaker 1: and they found that the vast majority of their profits
Speaker 1: came from betting these short odds bets, you know, like
Speaker 1: the equivalent of minus four hundreds five hundred type of odds,
Speaker 1: because they were able to find decent edges there and
Speaker 1: the risk was so low that you know, when you
Speaker 1: state them properly, you can make much more profit.
Speaker 3: Right. And the reason that the edge is there is
Speaker 3: because the public all wants to take the other side
Speaker 3: of that. They want to bet a little and win
Speaker 3: a lot, and it forces the price in that direction
Speaker 3: for the person taking the other side.
Speaker 1: Yeah, absolutely, I mean the book makers, you know, people
Speaker 1: think that a bookmaker wants to make the same amount
Speaker 1: of profit whether the favorite wins or the or the
Speaker 1: long shot the underdog wins. But that's not really true
Speaker 1: because they take a lot more liability on those long shots.
Speaker 1: When the long shots come in, you know, they're putting
Speaker 1: out an awful lot of cash because a lot of
Speaker 1: the public is on them rather than the favorite.
Speaker 2: So if the Raiders win the Super Bowl next year,
Speaker 2: the books are really going to take a bath.
Speaker 1: Yeah, yeah, because I'm sure and now the books are
Speaker 1: they're not quite as dumb as they look, you know,
Speaker 1: the even the soft.
Speaker 3: It depends on which one you're talking about.
Speaker 1: But they they build in what people call the favorite
Speaker 1: long shot bias, so that if if the Raiders have
Speaker 1: like azer point one percent chance of winning the Super
Speaker 1: Bowl next year, then you know, the fair odds would
Speaker 1: be a thousand to one, right, But they're only going
Speaker 1: to pay you like two hundred to one if the
Speaker 1: Raiders win, because they they they want to protect themselves
Speaker 1: from those you know, big outlays, and that gets baked
Speaker 1: into these these lines in a very consistent way. And
Speaker 1: people have been noticing this phenomenon for decades and they
Speaker 1: call it the favorite long shot bias. And one of
Speaker 1: the things that I looked at in my first book,
Speaker 1: which is but how Much did You Lose, is the
Speaker 1: fact that when you look at it in terms of
Speaker 1: expected value, it does look like a bias those bookman
Speaker 1: because they're asking for a lot more expected value from
Speaker 1: the better for these long shots than they are from
Speaker 1: the favorites. But if you look at it in terms
Speaker 1: of expected growth from the bookmaker's point of view, and
Speaker 1: you adjust for the risk that they're taking, it actually
Speaker 1: works out to be exactly the same for favorites and
Speaker 1: long shots, no matter how long the long shot is.
Speaker 1: So they're getting the same type of expected growth from
Speaker 1: a plus four hundred long shot and a plus one
Speaker 1: thousand long shot and a plus five thousand long shot
Speaker 1: because they keep shortening the pay the shortening the offered
Speaker 1: odds compared to what the true odds should be to
Speaker 1: keep that expected growth constant. And same thing with the favorites.
Speaker 1: They give you a smaller edge for a minus one
Speaker 1: thousand than they would for a minus two hundred, but
Speaker 1: the expected growth from their perspective winds up being the same.
Speaker 2: Now you've mentioned a few times that the big key
Speaker 2: in making your bets or investments is making sure you're
Speaker 2: the favorite, making sure you have the advantage. So the
Speaker 2: question becomes, how do you know if you have the
Speaker 2: advantage or not?
Speaker 1: That is a great question and sports betting, the best
Speaker 1: way to know whether you have the advantage is if
Speaker 1: you have closing line value, which means that when the
Speaker 1: bet change, when the odds on that bet right before
Speaker 1: the game starts are shorter than the odds that you
Speaker 1: betted at, and they're shorter by enough to overcome the big,
Speaker 1: then you can tell that, assuming that that closing line
Speaker 1: is accurate, that you've got the edge. Now the question
Speaker 1: is is the closing line accurate? Well, for highly liquid
Speaker 1: markets that get bet back and forth many, many times,
Speaker 1: there's tons of evidence to show that those closing lines
Speaker 1: on average are accurate because people model it and say, okay,
Speaker 1: what if I were to bet at the closing line
Speaker 1: without any margin, you know, take out the big, but
Speaker 1: I bet at that closing line, and I bet ten
Speaker 1: thousand times, I should expect to make exactly zero profit
Speaker 1: if those odds are accurate, and they run these models
Speaker 1: and analyzes and they come out making basically zero dollars.
Speaker 1: So in sports betting. That's a really really good indicator
Speaker 1: in investing, Like in the stock market, there is no
Speaker 1: indicator like that. If people could could find that kind
Speaker 1: of indicator for a stock market or other type of
Speaker 1: financial investing, that would be huge.
Speaker 3: Well, there is an indicator, right, I mean, over one
Speaker 3: hundred plus years, the stock market games. Right. The only
Speaker 3: question is if you're going to try to get on
Speaker 3: and off the bus that's going up the hill, and
Speaker 3: if you could do better than if you just stayed
Speaker 3: on the bus to start with and get to the
Speaker 3: top of the hill, right, I mean, so you have
Speaker 3: an edge. The question is could you have a bigger
Speaker 3: edge by somehow making specific picks or timing or things
Speaker 3: like that.
Speaker 1: Yes, that's the key is that over the past hundred years,
Speaker 1: you know, the market has gone up. There's no reason
Speaker 1: to believe that over the next hundred years it won't.
Speaker 1: But that's that means if you own the whole market,
Speaker 1: spread out amongst thousands and thousands of stocks, like a
Speaker 1: lot of these index passive index funds will do for you,
Speaker 1: then you have an edge. But some people aren't satisfied
Speaker 1: with that. They want a bigger edge, and they spend
Speaker 1: a lot of time trying to figure out which stocks
Speaker 1: are going to go up and which stocks are going
Speaker 1: to go down. And maybe they're right, maybe they're wrong,
Speaker 1: but the academic research all says that the majority of
Speaker 1: them are wrong more than they're right, and the ones
Speaker 1: that are right more than they're wrong change every year, right, Like,
Speaker 1: maybe your picks will work this year, and Bob's picks
Speaker 1: will work next year, and my picks will work the
Speaker 1: year after that, but by then your picks have now
Speaker 1: gone bad when my picks are going good. So and
Speaker 1: you had fees on top of that for investment managers
Speaker 1: who are trying these techniques, and there's really ends up
Speaker 1: being no more edge. The edge, whatever little edge there
Speaker 1: is gets eaten up by the fees for the managers
Speaker 1: and does not usually make it down to the actual investors.
Speaker 1: So that's what I mean. There's no indicator for the
Speaker 1: whole market. Yeah, there's an indicator if you want to
Speaker 1: pick like Microsoft and say, oh, you know, I'm confident
Speaker 1: that Microsoft is undervalued and I'm going to buy them,
Speaker 1: and in ten years, you know, I'll make ten percent
Speaker 1: a year. Well maybe you will, maybe you won't, but
Speaker 1: ten years isn't even close to long enough to figure
Speaker 1: out whether you really did have an edge when you
Speaker 1: bought it, because there's so much noise in the price
Speaker 1: of these stocks over time that you know. It's like
Speaker 1: it's like making, you know, twenty bets at the blackjack
Speaker 1: table and saying, oh, well, I'm up one hundred dollars,
Speaker 1: I must have an edge. Right, That's not how it works.
Speaker 2: I want to go back to when we were talking
Speaker 2: about beating the closing line value. It sounded to me,
Speaker 2: I'm not a sports better, but it sounded to me
Speaker 2: like when the line closes, you're going to know whether
Speaker 2: or not you had this edge. But assuming you make
Speaker 2: your line, you make your bets before the line closes,
Speaker 2: then you're not going to know if you have the
Speaker 2: advantage or not until sometime later. So if you don't
Speaker 2: know if you have the advantage or not until sometime later,
Speaker 2: it seems difficult to figure out whether you should bet
Speaker 2: or not or how much because you don't know what
Speaker 2: you're edged.
Speaker 1: Yep, you're absolutely right. It is difficult to figure that out.
Speaker 1: There's basically two techniques that get used commonly to figure
Speaker 1: that out, or at least approximated as best you can.
Speaker 1: One is called bottom up technique, where basically you handicap
Speaker 1: the game. You take into account all the factors that
Speaker 1: you think are going to affect the correct odds or
Speaker 1: the correct spread, and if the odds or the spread
Speaker 1: that the sportsbooks are offering is is better than what
Speaker 1: you predict, you make the bet. Now, you don't know
Speaker 1: if that stingle bet is going to have an edge
Speaker 1: when you make it, Like you said, you don't know
Speaker 1: until the line closes. But if you keep track of
Speaker 1: them and over the course of six months, you know
Speaker 1: you get closing line value on eighty to eighty five
Speaker 1: percent of your bets, then probably what you're doing is
Speaker 1: working and you can kind of gauge how big that
Speaker 1: edge is based on that track record. The other way
Speaker 1: to do it is called top down betting, where you
Speaker 1: basically look at the market as a whole and you
Speaker 1: monitor what kind of odds are being offered, and particularly
Speaker 1: pay attention to the sharp sports books and when they
Speaker 1: change their line and there's a reasonable limit that they're
Speaker 1: offering at the time, that basically indicates that somebody sharp
Speaker 1: has bet on that site they moved the line in
Speaker 1: response to that, and so like if they were offering
Speaker 1: plus one fifty on a baseball money line, and they
Speaker 1: moved down the plus one twenty, and you look around
Speaker 1: and some of the other sportsbooks still have plus one fifty.
Speaker 1: That's a pretty good indication that the plus one fifty
Speaker 1: is a good value bet and you should go bet
Speaker 1: it there. And typically you got to do it quickly
Speaker 1: because it's not going to last. They're going to start
Speaker 1: taking bets at plus one fifty and then they're going
Speaker 1: to move their line. So it's always a race when
Speaker 1: you're doing top down betting, but it is a very
Speaker 1: effective way to do it.
Speaker 3: But it's also a way to get your accounts limited severely,
Speaker 3: very quickly, because they know that that's what you're doing.
Speaker 3: The other problem, though, with the bottom up is you
Speaker 3: know you could build a model and be making good
Speaker 3: bets and do well this season, and next season your
Speaker 3: edge may not may be gone and you don't know
Speaker 3: it because things have changed, and you know, you can
Speaker 3: end up losing a bunch of money while you're realizing that, oh,
Speaker 3: looks like my edge is gone.
Speaker 1: Yeah, that's a big risk, and a lot of these
Speaker 1: kind of handicappers or modelers experienced that, and you know,
Speaker 1: if you can trust the closing line. It's going to
Speaker 1: be a help. But even still, your your edge can
Speaker 1: disappear and you don't know it, and that's a that's
Speaker 1: a big problem.
Speaker 3: Anyway, Thanks Dan, this has been great enjoyed talking about it.
Speaker 3: I hope you do well with the book. I have
Speaker 3: one question before before we go. Favorite restaurant in Las
Speaker 3: Vegas that's not in a casino.
Speaker 1: Gosh, I should have prepared for this. It's been to
Speaker 1: warn you. You should have. Yeah. God, it's been a
Speaker 1: long time since I've been in Las Vegas, but there
Speaker 1: was a rom and place that I went to with
Speaker 1: a friend of mine the last time I was there,
Speaker 1: and I don't know. I'll have to get back to
Speaker 1: you on the name.
Speaker 3: Okay, so you're not coming out for the World Series
Speaker 3: this year?
Speaker 1: No, No, it's it's it's too much of a hurdle
Speaker 1: to play those events, even the smaller events. They're like
Speaker 1: a three day event, and so if you're going to
Speaker 1: make any money at it, you've got to be prepared
Speaker 1: to play, you know, twelve hours a day for three
Speaker 1: days straight. Those days are behind me.
Speaker 2: And my last question before we go is who is
Speaker 2: the intended audience for your book.
Speaker 1: Well, the first book was really meant for sharp sports
Speaker 1: betters specifically, or people trying to become sharp sports betters,
Speaker 1: to give them kind of guidance as to what was
Speaker 1: important and how to accelerate their bankroll growth. The new book,
Speaker 1: Sharp Money, is really for anybody interested in investing, and
Speaker 1: you know their statistic to say, at least, you know,
Speaker 1: sixty percent of Americans have some sort of retirement account
Speaker 1: which is going to be invested in something. So you've
Speaker 1: got to figure out what are you going to invest
Speaker 1: it in and how are you going to evaluate whether
Speaker 1: that's a good investment. And you know, part of the
Speaker 1: book is about how to kind of rebalance your portfolio
Speaker 1: to optimize it. But a lot of the subjects in
Speaker 1: there talk about things like the correlation between different assets
Speaker 1: and get it make sure, making sure that you get
Speaker 1: enough return for the risks that you have to bear,
Speaker 1: and being able to evaluate that stuff. So people don't
Speaker 1: just you know, look at the you know, a spreadsheet
Speaker 1: of what the expected what the trailing returns are different
Speaker 1: investments and say, okay, well this one had did fifteen
Speaker 1: percent last year and this one did eight percent last year,
Speaker 1: So I'm going to put all my money in the
Speaker 1: fifteen percent one, because that's got to be the best one,
Speaker 1: you know. Spoiler alert, that's not necessarily the best one.
Speaker 1: Do you plan a third book? I'm all in it over.
Speaker 1: We'll see, we'll see how how I recovered from this one.
Speaker 2: Well, that's good. As long as you can there sell
Speaker 2: it to sixty percent of the population, that's that's done.
Speaker 2: Pretty good.
Speaker 1: There you go, Yes, son, audience is a much bigger.
Speaker 2: Thank you for coming. We appreciate your time. Oh wait, sorry,
Speaker 2: there's one last thing.
Speaker 1: You scared me.
Speaker 2: When I first got your your book, I got a
Speaker 2: review copy and it said, if you share this review
Speaker 2: copy with anybody, you're never going to hit another royal
Speaker 2: flush in your life. Now, I'm a video poker player,
Speaker 2: and that was that really would hurt me to the
Speaker 2: core to have no more royal flushes. So that scared me,
Speaker 2: honest on your thing. So I just want to know
Speaker 2: that you're scared at least one person.
Speaker 1: With that line. That was special for you.
Speaker 2: Bob Ah very good.
Speaker 1: I do feel special.
Speaker 2: So thank you for being here. Thank you Richard. Go
Speaker 2: out and hit lots of royal flushes everybody. Good day.
Speaker 1: Free audio post production Biophonic dot com