Have you ever had a long and sustained losing run and thought that the punting gods had turned against you?

In this interview on RSN - Radio & Sport conducted by Nadia Horne, Dean the Trial Spy explains the concept of Variance, some betting mathematics, and the importance of having a betting bank to deal with inevitable periods of drawdown caused by variance (or what the average punter would call a 'losing run').

In addition to the audio interview (link below), we’ve also provided a written transcript for those who prefer the written word.



Transcript from interview on RSN – Racing and Sport

Nadia Horne: Dean the Trial Spy joins us. Today we're going to talk about variance and also dealing with bad runs in particular. Dean how are things?

Dean Evans: Very well Nadia, how are things with you?

Nadia Horne: Extremely well, I think this is a topic that we could discuss at length because dealing with bad runs and just trying to put that into a figure can be a massive challenge for punters.

Dean Evans:  Absolutely, Nadia, it's a vitally important topic as at the end of the day protecting your betting bank is key because if you go bust, well, it’s all over. Sometimes it's interesting when you look at the mathematics of the odds of horses you are backing, when we see a $1.50 pop we expect it to win and are often surprised when it gets rolled, but the fact is mathematically, a $1.50 pop roughly gets beaten 33% of the time, a $1.80 pop gets beaten 45% of the time and an even money favourite gets beaten about half the time, and meanwhile if you’re backing horse at say $5 and it’s hard in the market and might be second favourite or even favourite, it's still mathematically going to get beaten 80% of the time. So, when you look at things that way, it's actually easy to see how losing runs can occur. So you need to prepare to deal with them.

Nadia Horne: I think you’ve got to change your perception in dealing with racing. We look at a horse and say ok, you're $1.50, you’re an absolute moral, there's no such definition in racing because it's all probability. All you're doing is, you're trying to find holes in the market where you believe that the probability of that horse winning is more in your favour than what the market is, and that's virtually all we’re doing; we’re trading.

Dean Evans: That's exactly right, and understanding the mathematics over this is key for those who are interested in taking a long term perspective and betting long term. You know, if someone has a 30% winning strike rate, and they have, say, 40 bets a week, theoretically that should be 12 winners a week. But we know that's not going to happen week in, week out. But for basically every week you should have somewhere between 6 and 18 winners from your 40 bets that week, however, what people don't realise is it's a cold hard mathematical fact that you're a 98% chance of encountering a losing streak of 14 or more at some stage during that year, and in fact you can expect 4 such losing streaks of 14 or more over a 12 month period. And people with a 30% strike rate, a lot of people don't quite grasp that. Variance occurs in all aspects of investing and another good example is Apple. Everyone knows the iPad and the iPhone but Apple's shares have gone up something like 70 fold in ten years, and many investors probably think that was a nice smooth sailing run, but there's been substantial corrections during that period. The shares have dropped in value between 27% and 82% on various occasions, so you need to understand when taking a long term perspective that, whether it’s horse racing or any form of investing that these losing runs and elements of variance do occur.

Nadia Horne: Yeah exactly, and it's not just a straight line up, it’s no different if you’re investing in property or anything with up and down market trends; one of the hardest things to predict is the peaks and troughs in a market.

Dean Evans:  That's exactly right and I suppose to explain to people, a lot of people use the term variance, to try and to explain it really clearly to people. If you were to bet 1 unit at odds of $5 on a horse that you rated $4, that means 25% of the time you’ll make a profit of $4, and 75% of the time you’ll lose your entire dollar investment. So your expectation is 25%, but of course, as we know, you're not going to make a profit of 25% on every bet. In fact, what's going to happen is you’re either going win and you’ll receive a 400% return on your investment, or you're going to lose your entire investment; 100% of that investment. So the outcome that is significantly different from the expectation of your profit of 25% is what we call variance. And so obviously, the more events that you bet on, mathematically speaking an increase in sample size, the less variance there is and as the sample size increases, the actual return will trend to the expected return. So while you’ll never see a return of 25% after one event, you should start seeing it after say 100 events or more, with variance thrown in.

Nadia Horne: Oh you bring up some very good points, so Dean, just on dealing bad runs, what's the best way to do this?

Dean Evans:  Well it really demonstrates the importance of having a bankroll. Say you’ve got to situation where you and a friend are tossing a coin and if it comes up tails you get $2 and if it comes up heads, you need to pay your friend $1. Now that's the fantastic bet for you, but you’re still going to lose 50% of the time. So long term it’s just brilliant but there's going to be stretches or periods where heads will come up numerous times, and so short term you’ll be losing. So that demonstrates the importance of having a bankroll. You know, if you only had $1 in that situation you’re a 50% chance of going bust immediately, and so you're missing out on the highly profitable betting situation. So what people need to do is start with the bank, and the way we do things is, we recommend turning whatever your bank is into 100 units, and generally you’re investing somewhere between 1% to 3% of your betting bank on each investment, and that just allows you to deal with those losing runs. It's interesting if you look at how each fund managers and the like do that, trading derivatives or trading those sorts of things, they do a similar sort of thing where they trade roughly 2% (of their bank) on a trade, so I think there's a lot that horse racing punters can learn from people who are managing millions or billions of dollars in funds.

Nadia Horne: Oh you bring up some very interesting points and as we have discussed prior staking is also important, even if you are having a good run, you shouldn't be adjusting your stake because just around the corner will be that long losing run.

Dean Evans:  Well that's absolutely right, and I don't mind saying that with one of my services, Trial Spy, we made 220 units profits in 2013. But after 220 units of profit, in January and February 2014 we lost 47 units and we went through this period that we're talking about, and if members didn't bet using our staking strategy or with a bank, they could have potentially been wiped out, but those who stuck with the strategy bounced back and between March and August we’ve now bounced back with an additional 155 units of profit since then. But that profit is not possible if you've blown your bank or you've given up or lost belief in your method or process. So, the point I’m trying to make is that, no matter how strong your system or how high your strike rate, losing runs aren’t just a risk, they're not even just likely, they’re inevitable, they’re certain. Now if you're investing long term, you just need to be prepared for them, mentally, and understand it may not be your method at fault but simply the mathematical inevitable run of bad luck, and that's where the importance of staking, having a betting bank to work with, and sticking to a structure are just so vitally so important.

Nadia Horne: You bring up some very good points, Dean, thank you for your input today.

Dean Evans:  No worries, thanks very much Nadia.

Nadia Horne: There’s Dean The Trial Spy talking variance and also how to effectively deal with bad runs because yes you will have them, it’s a mathematical fact.