Investing with a Sports Betting Mindset

Investing & Trading:  Using A Sports Betting Mindset

Investing requires the amount of skill or thinking you decide to give it.  One can use the old 60/40 equity versus bond portfolio and expect, apart from 2022, to have good steady return over many years, or even closet index the S&P 500.  You can take it a step further and pick some of your own stocks based on your industry expertise or doing your homework.  With a bad entry point in an investment, you generally give yourself a mulligan and time for it to recover.  With an overall bad decision on an investment, we tend to own the mistake until tax loss season or until the pain is too much to bear.  Regardless of your style, the discipline of putting capital to work, at the time or moments, when you see a strong risk-reward, over time, is critical. 

You ever notice that the brokerage house analysts constantly change their price targets for the companies they follow?  Sometimes it’s that the company performed better or worse than they expected.  Other times it’s a relative multiple to their peer companies.  You also get the lowering of targets because their prior targets are a world away from the current stock price.  For goodness sake, look at the Morgan Stanley analyst, James Faucette, history on his Paypal price targets.  He has been telling investors to buy the stock since 2021 and had been using a $340 price target!  The company hasn’t grown revenues more than 21% since 2017.  The stock is now $75.  The “investor” who bought shares in 2021 is unlikely to ever be profitable in his purchase.  Why?  They clearly did not assess the risk-reward properly and perhaps they should have used a sports betting line concept in their thinking? Let’s discuss!

When PayPal’s stock was $300 in 2021, the analysts had 2024 earnings estimates of $9, or 33x those three year out projections.  This EPS projection would have required three more years of 25% EPS growth.  No lay up, right?  Back in 2021 though, you were paying upwards of 65x the current earnings (2021) and assuming 25% in perpetuity.  For those sports betters, the money line is meant to compensate the gambler that bets on the favorite or underdog based on the perceived chances of an outright win.  For example, the Knicks versus Miami at 3:30 today has the Knicks +148 to win and the Heat at -175.  For $100 bet on the Knicks, a win would get you $100 plus $148 or a 148% return.  A $100 bet on Miami, you only get your $100 back and $57.14 more, or a 57.14% return.  Of course, if your team loses, you lose your entire principle of $100.  The sports book is doing the mathematical equation that balances the amount of betting taking place on a particular team with their chances of winning.  And, like the stock market, the odds change up to and during the game based on amount of time left, lead changes, injuries and the number of fouls for players and team. 

So, what was the money line on PayPal at $300 in your view?  First, one important difference is the probability that your investment goes to $0 like when you lose the sports bet is very, very low.  That is a nice to have, but no great solace as we aren’t discussing a binary biotech stock here.  Equally, this is why many speak of short selling as being difficult as you can lose more than 100%, unlike long investing.  What was the money line discounting in the market that the $9 in EPS in 2024 would be correct? Maybe it would get a Visa/MasterCard multiple up to 30x in 2024 would be my thinking and we were pricing that in 2021? The sell-side price targets were 10% or so higher, mostly by using mental gymnastics, which can change quickly (as we saw). Gosh, in my sports book, the money line should have been -1000 when the stock was $280-320, or for a $100 investment you can expect a 10% or $10 return over the years 2021-2024.  And when and if things go wrong, you lose 75% of your investment during that period.  Sure, it feels easy to say, in hindsite, but was it really? These are lessons we all need to learn, remember and benefit from in the future by seeing the forest thru the trees.

Now, how about that money line in regional banks? Imagine if one year ago, there was a sports book on the regional banks showing -1000?  You would have questioned, rightly so, what was so unattractive about these stocks that the market was giving you such horrific odds?  The banking crisis highlighted that major banks, mega and regional, bought massive amounts of mortgage debt in the 2-3% range when rates went to 0% during the Covid induced Fed easing.  The reward was 2-3% unlevered and the risk we now see was 20-25% marked to market, which from a book value standpoint would theoretically wipe out many capital bases entirely if forced to sell.  What’s the money line on being the bank CFO and placing that bet and assuming it will all work out ok? -5000? Today, the sports money line on regional banks would likely be +500 giving the investor large potential returns but very high risks (and possible 0’s). As above with the PayPal analyst, there had to be some probability assigned to growth not working out as projected or for the banks that rates would back up and kill their balance sheets.      

Let’s put it all together and relate it back to trading and investing some more.