You will often hear comparisons between sports betting and playing the stock market. But just how similar or different are the two and more importantly, is either one the safer bet?
If you spend any time at all watching CNBC or any other financial channel, you will constantly see bad gambling advice. “Trade your way to riches!” “Want to make money? Backtest, backtest, backtest!” “Double your money with these hot picks!”
There sure are a lot of people who want me to make money. It reminded me of all the touts offering you the “game of the year” or a “super money system”.
There are a lot of similarities between the stock market and sports betting. The insiders and bookies/brokerages make most of the money. People blindly throw money at both, and hope they end up with more. With hard work and a little luck, you can win at either.
There are a few key differences though. Most importantly, the information in sports is much more available than in stocks. Does Peyton Manning have a sore back? What is Ben Sheets' ERA for the last three games? How many aces did Roger Federer have in his last match? You can find it in 30 seconds.
Not only is the information easily available, it is almost always accurate. Injury reporting is tightly regulated. The leagues track minutia with impeccable precision. When I bet on a team, I know the risks. I’ll win or lose, and usually due to players or events you expect. There are surprises, but even the worst beats don’t leave you scratching your head asking, "What the hell is this?"
Unfortunately, the information on stocks is much murkier and often simply wrong. It’s almost impossible to tell what a company is worth. While most companies do not blatantly “cook the books,” they do play games. There are all kinds of accounting manipulation, so that stocks are not what they appear. How much is a bad loan worth?
The answer is...it depends.
Astoria Financial made $38 million in bad loans “disappear” overnight. They did this by reclassifying loans in default for two months from “troubled” to “healthy.” Sadly, the Astoria game is not an isolated incident; just look at the recent Bear Stearns fiasco. The financial reports provide little guidance, and often misstate reality.
The stock market should take a lesson from the sports world and become more transparent. Until that time, I’d rather keep betting on sports than an accountant’s honesty.
Which is the riskier investment?
© Copyright 2008. Reprinted with permission of the author.