Section 1: Primer
Tired of losing his money to the house, a bored millionaire in Las Vegas turns to you and offers you a proposition that you can’t refuse. He pulls out a stack of casino chips and declares:
“I’ve got a 100-sided, evenly weighted die, which I am going to roll. If it comes up 1 through 57 you win, if it comes 58 through 100 I win. We’re playing for even money. How much do you want to bet?”
How would you respond? Obviously you accept, but you are uncertain as to exactly how much you should wager – you are a solid favorite, but not an overwhelming one. The answer to this question is much deeper and more important to an investor’s bottom line than the average sports bettor ever realizes. This series of articles will provide the single most comprehensive investment optimization guide available on the internet, and will show you how to size your bets according to (1) your risk tolerance and financial goals and (2) the duration (number of bets) of your investment. Just as we use rigorous mathematical models to consistently pick winners against the spread, so too will we use simple but powerful financial formulas to achieve the greatest risk-adjusted return possible from those selections.
For bettors with a relatively low risk tolerance who are investing their money for one season, we will describe how to use a relatively flat betting structure, where your bets remain constant throughout the season, and how you can use the star system optimally. For bettors who are more risk tolerant, or who are investing over a period of several seasons (one sport over several years, or several different sports in one year), we will outline a more aggressive growth strategy with optimally fluctuating dynamic bet sizes.
For the bettor who just wants an approximation of what is generally correct, we will outline a summary in the next section. For the more advanced bettor who is curious to learn the fundamental logic behind our bet sizing systems, we will then describe the mathematics behind the Kelly Criterion, a formula which relates edge and odds to bet sizing for optimal investment in the sections that follow. We will continue to explain some of the nuanced concepts, such as simultaneous/sequential events, return/volatility ratios, and fractionalization. This should help illustrate how powerful the very simple, yet frequently misunderstood formula can be when applied correctly, and how to avoid disastrous mis-applications of growth sizing.