The secret to success. Diversification.
Why portfolio power can increase your long-term profits
I recently received an email from a member (Liam) who asked me this…
“I have a question about my betting. I’ve been punting for as long as I care to remember, and I keep track of all my bets and have had some nice wins over the years.
However I have 5 tipsters I use, and I am finding that when they all go on a bad run it can really hurt. The thing is we are told volume is your friend but I have found over the last few years volume is my enemy!
Just wondered have you had any experience or advice on this“
Now my response to Liam was one based on my own personal betting background, as well as my experience of managing a number of betting syndicates all at the same time…
Added to a tried-and-tested practice that comes from the financial world, namely something called diversification. Which I’ll come onto in just a moment.
But first…
Here’s what I said in reply…
(I’ll spare you the pleasantries and go straight to the meat in the sandwich)
“It’s a very interesting point you raise, as from a commercial, and administrative, perspective I have to balance the scales between a range of services covering all manner of sports, but not too many as I can’t cope…
Same goes with my own personal betting, I like an interest in different sports, and a range of bet-types, but not so many as I lose track of where I am.
Anyway chances are, Liam, that all these services aren’t firing at the same time – sadly!
As with all betting interests, and many financial investments, the 80/20 rule seems to apply (where you make 80% of your profit in 20% of the time) so long spells will be spent treading water, or slowly drowning!
So from my point of view, I have 2 main racing services (Racing Intelligence, The Professional), 1 golf syndicate (Golf Insider), 1 principal football operation (Scottish Football Income Booster). Yes, a few other irons in the fire, but I couldn’t operate, say, 8-10 services all at once.
And quite frankly 8-10 “good” sources of information are damn hard to find.
But if you do choose right, then you don’t need that many. Presuming you’re not being greedy!!
Make a decent profit, and be happy with that. And whilst the logic says if you have 10 profitable services you’ll make twice as much as if you had 5… it never quite works out like this. And, as I say, quality is hard to come by.
Overall I think your approach is correct. Weed out the better 2, 3 or maybe 4 services and stick with this high-quality portfolio… don’t have so many interests that it becomes an administrative and practical nightmare to work on a day-to-day basis.“
On the back of this reply, Liam came back to say that he’d follow my advice – sensible chap! – and create a small set of services that he’d selectively follow.
The high-quality portfolio that I outlined.
And it’s this approach, or investment strategy, that leads onto the subject of this article.
So what exactly is diversification?
Well, according to Nick Lioudis writing on investopedia.com this is what it’s all about…
“Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas… most investment professionals agree that diversification is the most important component of reaching long-range financial goals while minimizing risk.”
I then came across the words of Joel Greenblatt, a leading academic and highly successful Hedge Fund manager…
“You must be diversified enough to survive bad times, or bad luck, so that skill and good process can have the chance to pay off over the long term.”
And isn’t that always the case when it comes to the ebb-and-flow of horseracing tips or expert football bets? Given the fact that every service doesn’t win all of the time, you need another to pick up the slack when required.
And just ending the observations of these Wise Men who preach the gospel, the words of US economist, and Nobel prize winner, Harry Markowitz…
“In choosing a portfolio, investors should seek broad diversification. Further, they should understand that [everything] involves risk… and their portfolio should be such that they are willing to ride out the bad as well as the good times.”
So when it comes to the question of how to make money from betting, these pointers from experts in the financial world show that it makes clear sense to spread your interests.
And it is pretty clear that placing all your eggs in one basket is something of a high-risk strategy… that’s not to say it can’t deliver the goods, but if your one service, or sole investment, hits the skids then how are you going to make money?
This is why I suggest to members, like Liam, that having more than one tipster at their disposal is the best way to maintain bank size, and give them the best chance of growing that bank.
After all, isn’t that what you’re wanting to do?
But there are dangers to diversifying too much
As I said to in my initial email response, too many interests can lead to practical, administrative and financial issues.
How much time do you have to place bets… log performance… and have you the bank size to withstand multiple outgoings (any number of bets) all at the same time.
So not only do you need to locate real quality information – which is easier said than done, and I know having been on the hunt for the past 25 years! – but you then have to manage that on a daily basis.
And does the time and effort justify the extra returns, as Lioudis went on to say…
“Obviously, owning five stocks is better than owning one, but there comes a point when adding more stocks to your portfolio ceases to make much difference.”
And here Lioudis echoes my own comments about striking a workable balance between the number and quality of investments you make (or in this case, the services you join).
There are also further words of caution from the Yoda of all investors, Warren Buffett…
“Wide diversification is only required when investors do not understand what they are doing.”
I’d pick up on the word “wide” here. Diversification, yes. But spread yourself too thin and you’re going to be in trouble.
The same thought struck me, taking a line of the comments of Nick Lioudis, namely…
If you have that many services on the go, your stakes are going to proportionately decrease each time you add another expert golf tipster or professional horseracing backer, so any winnings from that extra service will have that much less of a positive impact on your betting bank.
Moderation in all things…
The key with all investments – whether playing the financial markets, owning stocks & shares, or joining a range of betting syndicates – is to find that combination which strikes a happy and workable balance between security on the one hand, and money-making on the other.
We all have different risk profiles, so this will be on a sliding scale. But what is undeniable is the benefit and value of having access to more than one source of bets.
Any service will have peaks and troughs of performance, and to smooth out the ride, to soften the curve, a multiple layered approach is preferable. And this technique of diversification, or “portfolio theory” as the economists also refer to it, is the way I operate my business, my own personal betting… and all I can say is that after 25 years, I can vouch for its effectiveness!!
OPINION: It’s easy to get yourself lost in industry jargon (and the money markets aren’t readily familiar to everyone). So to break it down into simple terms, I’ll close with this quote from a US comedian, Eugene Mirman. He said, “I believe in diversification of income, because you never know what will happen. I’m a slightly paranoid person who thinks things could be ruined at any time.”
And this is why I tell members of Racing Intelligence to look at the Golf Insider, or those in Scottish Football Income Booster to join Top Dogs. It’s insurance. It’s peace of mind. And in the long-term it’s also the potential for you to make more money, with less risk.
