Money managers under the microscope
LIPPER: Equine vs equity investing
Is betting on horses very different from picking stocks? Can understanding a gambler’s approach and mentality give a better understanding of fund managers?
In searching for answers to these questions, I spoke to Paul Moulton, a professional gambler who originally worked in the fund management industry. He then set up a fund research company (Fitzrovia International, which he eventually sold to Reuters), although his working life began with an attempt to become a professional chess player.
Most of the fraternity of professional gamblers who make a living from horse racing are what Moulton describes as ‘traders’ or ‘chisellers’.
This group do not really look at horses at all, but look at market movements, hedging back their bets, and aiming to make tiny but regular profits with much less risk. They remain tucked away in their homes in front of an array of computer screens.
Moulton sees himself as part of a second, smaller group of professional punters, those he refers to as ‘judges’, some of whom look at horses in the paddock to assess their physical condition and thus their chances, while others are more reliant on assessing form based on previous races.
Some of them may even be conscious of the FSA’s warnings on funds’ past performance, which is deemed to be no guide to future returns. Although past performance does tend to shorten a horse’s starting price.
As part of this approach, Moulton has gathered vast amounts of data on all aspects of racing (jockeys, trainers, pedigrees, speed figures and so on) in a database that covers all horses in all races in the UK and Ireland since January 2005.
Although his background in fund research lends itself to such an approach, Moulton admits that, while his original idea was to “out-stat” everyone else, this approach has turned out to be much more limited for determining which outsiders to back.
He did try to do all of this from home, but in the end he was better able to deal with losses when trackside. The journey home enables Moulton to carry out a post-mortem of his performance, win or lose, and to clear his mind before returning to the family.
So he now spends more time looking at the horses in the paddock too, even though being at a course means that it is a little more “archaic” when trying to work out “what the market is doing”. But even this has a beneficial side-effect: it is far easier to bet on too many horses in too many races when sitting at home and betting over the internet, he says, while, for practical reasons, this is far less the case when at a course.
TOO MUCH INFORMATION
Moulton acknowledges the above findings from Russo and Shoemaker. From his own experience of building a horse racing database, he is all too aware of the desire to add in a new piece of information after virtually every race.
In the early days this process of amassing more and more data on which to base decisions was “comforting” he says, but he has found that “it doesn’t help results.” The more detailed any extra analysis that he runs, the smaller the sample size becomes (for more recent races) and the less meaningful the findings are.
“Once filtered to that degree, apparent patterns are really just statistical tricks.”
At its heart, Moulton’s approach to placing bets is to look for value in the market. He creates a ’tissue’ for each race, assessing the price at which he would be prepared to back a horse and then compares this to the odds offered by a bookmaker.
Moulton tries to divorce himself from picking winners. ”Anybody can pick winners,” he says. “There’s no point in picking winners if you’re backing them at the wrong prices, because sooner or later you’ll come a cropper.”
It’s for this reason that he’s always reluctant to answer the question from the occasional punter “who is going to win the 2.30 at Haydock?”
“In all likelihood I’ll back several horses in the race if I think they’re good value and still expect to lose, which most [amateur] punters can’t quite get their heads around.”
Yet after all this work over the past five years of professional gambling, it might come as a surprise that 93 percent of the time Moulton’s chosen horses lose.
Luca Cumani, one of British racing’s leading trainers (and who trains some horses that Moulton owns), on hearing this said, “if I got 93 percent of my decisions wrong, I would not be able to call myself a professional anything.” Moulton’s response to this is that it doesn’t matter as long as the average odds of his selections are greater than a 7 percent chance (or 13-1) because, in the end, “it’s all about profit”.
In the same way, if typically one backed horses at 33-1 (i.e. a 3 percent chance of winning), then one could get away with losing 96 percent of the time and still make a profit. This contrasts with picking 2-1 shots (a 33 percent chance), where one has to be right more than 35 percent of the time.
In Moulton’s view, each gambler has to decide where on this ‘risk spectrum’ he believes he can succeed, much of which comes down to temperament. Most professional gamblers are focused on those horses with shorter odds, while Moulton chooses horses with longer odds but has to deal with losing more frequently.
He admits that there are very few punters at his end of the spectrum. But this does not come as a surprise, indeed he seems to relish the apparent loneliness. As he says, “it does do funny things to your brain when you lose 93 percent of your bets!”
Whatever happens, he can draw more than a little comfort from the fact that all his work is tax free (since the 9 percent betting commission was abolished a decade ago) and has gone to great lengths to check that HMRC will not come knocking at his door . It is as though all of his investments are held in a huge ISA wrapper.
To hit the golden 7 percent, he spends over 80 hours a week at work. His unwavering logic is that to spend that amount of time he needs a decent return, and to do this he needs to place a decent stake. So Moulton fairly routinely turns over £100,000 a day at the big festivals and consequently turns over several million pounds a year.
“I don’t think there’s a serious professional gambler who has made 10 percent of turnover” he says, so his daily stakes of a few hundred pounds back in 2006 were simply not high enough to earn the sort of living he wants to sustain.
Even to make £25,000 a year, on 5 percent of turnover one would need to turn over £500,000 a year or £2,000 a day. As a result, Moulton concludes that “betting on horses is only 50 percent of a professional gambler’s skill, the rest is in temperament and stake management, both if betting too much and too little.”
DEALING WITH LOSING
The biggest challenge for Moulton remains how to deal with losing runs when a 7 percent success rate looks further and further away.
For Moulton it is in the nature of things that he will hit bad spells as winners don’t come neatly spaced between losses. His approach requires consistency but a run of losers has often tempted him to start tinkering with that approach in order to try and end the losing streak – a fatal error.
This has clear echoes of the pressure on fund managers to deliver short-term returns despite managing money for the long-term. Perhaps Professor John Kay, who is leading an independent review into long-term investing in UK equity markets, has considered talking to professional gamblers.
Moulton has learned this the hard way. Each year he has gone through a “horrible, horrible losing run” and each year he has tried to train himself to deal with it better. Indeed early on he admits to losing all confidence in his abilities. He puts such losing runs down to being in his chosen end of the risk spectrum and he admits it would be “far better for my mental health” if he could find a proven method of making money from backing 4-1 shots.
Despite this, after five full years of betting, with 7,000 to 9,000 bets each year, Moulton has experienced two years that were essentially flat (before expenses) and three “pretty spectacular” years.
The occasional anonymous mention in the pages of the ‘Racing Post’ stands as testament to some huge wins. In July 2008 one columnist wrote in disbelief at meeting Moulton and finding that he had won £200,000 and £250,000 within a few weeks of each other. And in September this year he made nearly £600,000 over two pool bets.
More generally, when considering the similarities with investing in the stock market, Moulton points out that the vast majority of the time, the competitive environment in which companies operate changes relatively slowly, enabling analysis to be carried out over a reasonable length of time and in depth.
He contrasts this with the competitive environment for a horse race that can change in moments – and often does, such as the previous race highlighting a bias relating to positions in the draw. And of course a horse race is over within a matter of minutes. Moulton has not had to develop the equivalent of a ‘buy and hold’ investment strategy.
While he may have found an asset class uncorrelated to stocks, bonds or even gold, indeed even the euro zone crisis does not figure very prominently in the minds of punters, if oil rich Middle Eastern owners such as Godolphin (the Maktoum family’s private horseracing stable) decided to leave British racing, this would surely send an earthquake through the sport.
Meanwhile, Moulton’s own moderate success as an owner — despite friendships across a range of trainers and jockeys — gives the lie to the idea that apparent ‘inside information’ is the key to success. Indeed much trackside information is available to all, with those in the paddock able to tweet their views to punters within moments. Moulton himself is an avid tweeter – @moulton66. So “market chatter” is increasingly open – and you don’t get much more transparent than when a horse is sweating!
As for dealing with bookmakers, his response makes clear the implicit trust in those relationships: “If I had to choose one group of people with whom to do business the rest of my life, it would be bookies.”
THE BITTER END
Moulton would not be drawn on whether his family was the equivalent of dealing with investors in a mutual fund, although he has avoided running a syndicate because this would end up with him being answerable to shareholders. Instead he asserts that he is better at being a professional gambler than anything else he could turn into a career and so it offers the best chance for him to support his family comfortably.
What might be seen as a risky career is bolstered by steadfast confidence. “Even if I lost 50 percent of my capital, I would – I would, I would, I would – turn it around.”
So in 2010 when he sold his beloved E-Type Jaguar to raise some cash, he did not adopt a more cautious approach and proceeded to lose the money made from the sale in 45 minutes on the racecourse.
So how far would he really go? “I would go all the way.”
Conviction, dedication, self-awareness and a consistent investment process. Surely attributes all investors long for in a fund manager; although you would allow them some nerves if the trackside approach to capital preservation turned up in their fund factsheet.
(Editing by Joel Dimmock) ((firstname.lastname@example.org; Twitter: @reutersJoelD; +44 20 7542 3505;))