“To create the proper balance and diversification is even more important than any particular bets … which is the opposite of how most investors operate.” – Ray Dalio.
When looking at sports wagering as a legitimate investment endeavour – it can be helpful to borrow techniques and evaluations from the professional investment world where discussions of stocks, bonds and interest rates are most common. It can provide us sports investment folk with measurements that can help us assess performance with greater clarity.
With the high volatility – or fluctuation – of the returns in sports betting, one measure that can be particularly handy for assessing your sports investment performance is annualised return. This involves taking an annual series of potentially disparate returns and transforming these into a single figure to quote as an annual compound rate of return.
[although this is defined as “annualised return”, there is no reason you could not apply the calculation to monthly or another consecutive period as desired.]
Let’s take a random series of annual returns.
Year 1 : +39%
Year 2 : +7%
Year 3 : +88%
Year 4 : -16%
Year 5 : +24%
The variance in these returns makes a cursory evaluation challenging – are your eyes drawn to the single negative year, or attracted to the most positive year? It seems to be a successful strategy, but to what extent? How can we best evaluate this investment approach?
As the investment manager responsible for these returns builds a track record, it might suit him/her to smooth this return out and present it as the annualised return described earlier. This calculation is quite a simple one once you find a decimal power calculator*.
The math involves expressing the return percentages as a decimal (with positive % years getting +1, ie 39% = 1.39) and then multiplying them out and raising them to a fractional power of the number of investment periods being assessed [which is 1/(number of years)] : in this case here with 5 years, it is 1/5 fractional power, alternatively 0.2. (Four years would be 1/4 or 0.25, 10 years 1/10 or 0.1 etc).
So, (1.39 x 1.07 x 1.88 x 0.84 x 1.24)^1/5 or (1.39 x 1.07 x 1.88 x 0.84 x 1.24)^0.2,
= 1.2384*, giving us an annualised return for the manager over this period of +23.84% compounded.
In checking, let’s follow through the five years with a $100,000 investment.
Year 1: +39% = $139,000 | Year 2 : +7% = $148,730 | Year 3 : +88% = $279,612 | Year 4 : -16% = $234,874 | Year 5 : +24% = $291,244 |
Checking this against a $100,000 at a 23.84% annual compound:
= $291,276. [Which given the rounding adjustments, is pretty pinpoint.]
Hopefully, this calculation will come in useful in your own investment work.
*(for those without an adequate calculator – see http://easycalculation.com/exponential-power.php )