What is Value Betting?
Value betting is essentially a bet where your own calculated odds of an outcome are better than those calculated by the bookmaker.
In stock betting, we simulate bookmaker odds with Benchmark Implied Probabilities. If the Implied Probability of an outcome is greater than the Benchmark, we are able to say value is present, which doesn’t necessarily make the bet a good one. If one’s own calculated odds are 4.55 and the bookmaker’s are 9.00, is this a great bet? No. Although there is value, the odds are still poor. We’d take a pass on this bet. Again, we are looking for an intersection between value and good odds. That’s the sweet spot.
The Bookmaker’s Advantage
If you’ve dialed in your Benchmark Implied Probabilities, you will find that true value bets are rare, especially after the Vig. After all, as you well know, the house doesn’t like to lose.
So how is one to win? More importantly, how does one find and exploit value bets?
For starters, you’ve got to develop an algorithm with which to appraise stock prices that is not utilized by bookmakers. Remember, an algorithm is just a set of rules to follow. It doesn’t have to be complex. Our own algorithm is comprised of 20 short lines of code, reducible to 16, that lives both simultaneously in our charting software and in Excel. We could also, in a pinch, run the algorithm in our heads. That’s how simple it is. Our algorithm is easy to take for granted now. Too easy. And I have to remind myself that it took 20 years of trial and error to develop it. In fact, this is the algorithm that convinced me of the relative unimportance of sophistication.
So don’t be discouraged if you are forced back to the drawing board time and again in search of an algorithm that will enable you to join the house in its bets against the squares. It’s worth the blood, sweat and tears.
I actually want you to succeed!
I’m betting against you, but I want you to win, too. I sincerely do. Notice I’m not charging you for anything. I don’t run a fund in which I want you to become an investor so I can charge you a fee. I don’t need you to come to a seminar. I don’t need you to buy a subscription to a special Insiders Only newsletter. And we don’t need your traffic to generate ad revenue.
We won’t necessarily share our secrets with you, but we do want to share the process whereby which we arrived at those secrets, hence this betting series. We want to inspire you to develop your own secrets. We want you to become self-reliant. We want you to shed your predilection for seeking out confirmations of your biases. We want you to kill your gurus. We want you to be radicals bent on reintroducing as many little inefficiencies into the market as you are able. We want you to form your own opinions and place your own courageous bets.
That’s all we want.
More in Part IV.