MONEY MANAGEMENT

Part 1

First, let me say that even if you have a better than average winning percentage you will fail to make profits if you do not use or incorporate a faulty money management system. 

Professional gamblers, stocks and bonds traders, arbitragers, or any similar professionals understand the necessity of valid money management systems.  There are several reasons for the need of such a system.  The obvious one is to decrease risk while maximizing profits.  Another reason was told to me by Paul Paulson of www.moneykeg.com and author of Money and the Middle Man.  He explains,

“The reason for money management, in my opinion, is so that a bettor can comfortably utilize his edge.  Notice that I did NOT say “maximize” his edge.  The reason is because if you size your bets solely with the purpose of maximization, you trigger, albeit inadvertently, the biggest obstacle facing bettors – psychology.  What I am trying to say is that the more you ‘optimize’ your bet size system (what I consider a money management system as opposed to a picking system where you aim to pick the “winner” game, race, etc.), the larger your potential draw downs.”

By way of example, let’s say you have a bankroll of $10,000.  If you ‘optimize’ your bet in a simulation using techniques like, optimum f or the Kelly criterion, then your total bankroll will fluctuate more violently than if you size your bets with a simple 1% total bankroll bet.  The ‘optimized’ simulation may draw down your account over 30% in some instances while the latter will likely yield much less than that.

The point is this:  How will you ‘feel’ about your system after a draw down of 30%?  Is it likely that you will continue using the system?  Or will your “better judgment” win out as you add this picking system to the picking systems’ scrap heap?  I would venture to guess that most bettors would stop betting the system if a large draw down occurred.  The problem is that statistically, a system with a positive expectancy will still have large streaks of winners and losers.  If you should be so unfortunate as to start utilizing your strategy just before one of those inevitable losing streaks, then you will experience significant destruction of your funds.

The lesson here is to minimize your draw downs to a level where you feel comfortable.  That is, use a bet size where if you experience a string of losers, (which you will) then you will still move forward and still gain that statistical advantage called ‘positive expectancy’.  If you make your bet size such that each bet has no significant emotional effect, then you are practicing the proper money management.  If a bettor can achieve this, then he will know what it is like to have 13 losers in a row in a good system.  More importantly, he will be psychologically stable enough to weather the storm and achieve the profits he deserves for having the ability to foresee such occurrences and plan for them accordingly.” 

In simple terms, it is important to use a money management system that allows your bet size to be within your comfort level.  Using a money management system will help your psychology withstand losing streaks.  A bettor should make their bet size in relation to their bankroll small enough that there is no emotional effect on the outcome.  This will enable you to stay with a system long enough to see if works.

 There are several valid money management systems and some schemes that are not so prudent.  Many of these will be discussed in later articles.  For now, we will discuss a “percentage of bankroll”.  In this system, the player will risk a percentage of his current bankroll.  For this discussion, we will use a 2% bankroll ratio for the bet.  We like this amount because as explained above must people do not have the discipline or stomach to see large losses. As you can see in the illustration below, we start with a $10,000 bankroll so our first bet will be $200.  As our bankroll increases and or decreases so will our bet size.  We also make the assumption that we will have a 60% winning probability.  Bull Market Sports Handicappers has an average three year winning probability of 64.65% so we will be conservative and use 60% in our illustration.  This means that for every 100 bets there will be 60 winners and 40 losers.  As you can see in the illustration, one can expect to net $3,493.  This makes your total bankroll $13,493 at the end of 100 bets.

We will now compare this to a same size bet system.  We will start with the assumption that we will win 60 games with a bet size of $200.  This will produce $12,000 in gross winnings.  Now take the 40 losers at 220 (don’t forget the vigorish) which yields 8,800 in gross losses.  The net profit will be $3,200.  This is are not bad but not as good as the percentage of bankroll illustration. 

Some people who subscribe to the same size bet system will say it is not a fair comparison. They will say that many of the wagers in the bankroll system are greater than $200.  The argument is that if you wager more than $200 you will surely show larger profits.

Let’s look at this argument further.  First we take the average of all bets in the illustration.  Doing this will produce and average bet size of $205.  If you use this bet and multiply this by the 60 winners, we get gross winning in the amount of $12,298.  We then do the same for the 40 losers (again do not forget the vigorish) and we get gross losses of $9,019 for a net profit of $3,280.  This is better but still falls short of the $3,485 net winnings we experience using the percentage of bankroll system.  Another problem with this argument is that it is impossible to determine an average of previous bets because the bet have not yet been made.  Since we do not have a crystal ball its impossible to do this.

In order to make money in sports betting, you must look at it as an investment.  This separates the successful gambler from the “hard luck” loser.  Gambling must be thought of as investment such as the stock market.  Sports betting is a grind, do not expect to make a killing overnight.  People who bet large amounts either to recoup losses or to make large sums in a short period of time may have a gambling problem.  If this is you and you think you may have a problem, please go to the official gamblers anonymous site and see if you are in need of help.