What a $4.5M Super Bowl bet can teach us about investing
Lessons learned from the legend of Billy Walters
Super Bowl XLIV was important for many reasons
One, the Saints were playing in their first Super Bowl in franchise history, 60 months after Hurricane Katrina devastated their hometown of New Orleans.
Two, the Colts, who had the best record in the NFL that year, were seeking their second Super Bowl ring in 4 seasons, helping to solidify their dynasty, and the legacy of their quarterback (and now celebrity) Peyton Manning.
And three Billy Walters, American sports betting legend, wagered $4.5M on the game.
“what I do – Is I make a line on the game myself, my prediction of what I feel like the differential should be – (and) the larger the differential between the number they make and my opinion the larger bet I make” – Billy Walters on The Joe Rogan Experience
Above Billy loosely describes his “gambling philosophy,” and more specifically the train of thought he used when betting $4.5M that the Saints would take home the Lombardi.
This “value betting” systems embodies the core principles of a sound investment strategy.
Step one: determine value. In his biography “Gambler: Secrets from a Life at Risk,” Billy describes this process as handicapping, a process in which he grades opposing teams on a point system to determine their likelihood of winning and at what spread.
Similarly, we can apply our own investment frameworks to begin grading investment decisions and their likelihood for success.
Step two: examine the market. When making his infamous $4.5M bet, Billy recalls how surprised he was at the difference between his line (value) and Vegas. Often, he would only bet if there was a 1.5 or 2 point differential, but for Super Bowl XLIV it was 7 points. This caused Billy to double down and explains the extraordinary sizing of his stake
In our own investment lives, once we’ve determined the value of thing, next is to identify any inconsistencies between our opinion and the market. If there is (and it is justifiable) this is a great time for us to double down as well.
As a quick aside, March 2020 is a great example of this process. As many market participants sold due to pandemic fears, rationally minded investors should have recognized there were two possible outcomes for the stock market (which was priced at $2,237). One the world ends, and you don’t care about your stock portfolio (or really money for that matter) in a post-apocalyptic society. And two the market recovers, we beat the pandemic, and you make a ton of money investing when everyone else wouldn’t (today the S&P 500 is up 127% priced at $5088).
Step three, evaluate your outcomes, having an opinion and being right are two different things. Even Billy, one of the most proficient sports gamblers of all time, had bets go wrong. Being able to identify why they went wrong and whether you need to adjust your framework is key to making future investment decisions.
Cheers,
Rush