Sports Betting vs. Investing: Slight Edges Adding Up in Very Different Ways

According to CNBC, over 100 million bets were placed over Super Bowl weekend. Sports gambling is becoming more and more accepted as a casual part of the entertainment, but right now people are hiding from their spouses and partners the fact that they lost hundreds, thousands, or more. They are already planning their next bets to “just break even” and “just get back to zero” whereupon they promise themselves they will stop. But the more they bet, the deeper the hole gets.

A quick lesson on sports gambling odds. The standard odds on a basic spread bet are -110. Let’s take Super Bowl 54 as an example, where the betting line is Chiefs favored to win by 1.5 points over the 49ers. You can either bet on the Chiefs to win by 2 or more points (since 1.5 is impossible), or the 49ers to either win outright or lose by 1 point or fewer. Simple bet, only two outcomes. However, you must bet $110 in order to win $100. If you lose, you lose the entire $110. Feels very similar to a coin flip. However, the slight house edge is actually quite enormous over time.

Let’s say two people bet. $110 on one side, and $110 on the other side. One winning side will win, so they end up with $110 + $100 = $210. The other losing side ends up with nothing. The sports casino took zero risk and gets $10. $10 out of $220 is 4.5%. The casino got 4.5% of the total amount bet with essentially zero risk (the line moves to equalize both sides).

This “small” ~5% edge happens every single time, grinding you down to zero at a fast pace. If you bet $100 each time and lost $4.54 on average every bet, you’d have lost the entire $100 in 22 bets. In reality, the spread of possibilities is much wider, but with each bet, you are that much farther away from ever “breaking even” again. You keep playing, and the only inevitable result is broke. The only way to avoid catastrophe is to stop and accept the loss.

I am always disappointed when intelligent investing and gambling are confused. Here’s a timely tweet from @QCompounding:

Too many people focus on the first row above. 60% win and 40% lose? It looks too much like a coin flip. I put in money and my balance is lower after a year. Why bother?! Investing is the same as gambling, right? No! Over time, the fundamentals will win out. Investing directly in a basket of profitable companies with growing earnings is betting with the odds in your favor. Similarly, if you consistently buy real estate with conservative cashflow numbers, the odds are in your favor.

Investing with the edge in your favor adds up in a good way. The current price/earning ratio for companies in the S&P 500 index is about 20. That means if you buy $100 worth an S&P 500 ETF, that basket is earning $5 of profit every year. That $5 may be sent to you as a dividend check or used to reinvest into the business for future profits. It is a different “5%” edge”, but one that makes me excited instead as those earnings tend to keeping growing bigger over time. As you can see above, that edge adds up and will eventually overwhelm short-term market swings.

I recently read in a Warren Buffett biography that he once bought a slot machine and installed it in his house. He allowed his children to play with it, hoping that they would quickly learn a valuable lesson once their allowance kept disappearing into the machine. I wonder if that really worked.

I used to read up on various gambling strategies, but I have since personally decided to never bet on sporting events or casino games in the hopes that my children will never find interest in it. I want them to think – Why would I ever waste my time on things that virtually guarantee me to lose my hard-earned money? Instead, I hope to teach them to be excited when they see a good investment with positive expected returns.