1. Not a passive income
Buying stock is a set-and-forget type of investment. You can put some money in today, come back in 30 years and collect your profits. Not the case with value betting. You must actively place your bets, as well as take care of money management (deposits and withdrawals), account verification, risk management, research of reliable bookmakers, recording your bets and so on.
Granted, you can do value betting in parallel to your full-time job. In my experience, you can fit it within an hour a day and most games are taking place on the weekend anyway. Still, value betting is far from a passive investment in the true sense of the word. In addition to investing some money to fund your starting bank, you will also have to do quite a bit of work for those winnings.
2. Limited upside
The stock market is huge. There is not a single individual or entity in the world that couldn’t accommodate its capital in securities of some kind. The Government Pension Fund of Norway is worth north of US$1 trillion and is fully invested in the financial markets.
In value betting on the other hand you are placing bets. The size of those bets is limited by the bookmaker. The limits depend on the event and the market. In a recreational bookmaker (the kind where you would do technical value betting), even in the most liquid markets (say, 1X2 in the Premier League), you wouldn’t be able to bet more than 4 figures. On most markets you can hardly even bet 3 figures.
Provided that you place 40-50 bets with an average size of a hundred bucks (realistic on an average sports weekend), that is still a decent amount of money for most people. However, here comes the bummer:
Recreational bookmakers will ban you
If you do value betting, you will win money. This automatically means that the bookmaker will lose this money. Bookmakers don’t like that. Financing your value betting hobby is certainly not their business. Once they find out you are doing it, you are out. In most bookmakers that translates to limiting your bets to some laughable amount of, say, 1 $/£/€ per game. At this point there is nothing left for you than to withdraw your whole balance and look for another bookmaker to bet in.
At some point all your options will be depleted. Depending on the bookmakers you have at your disposal, this might take quite some time or not so much. In most cases, before you get there you can make a pretty decent profit to show for it.
3. The volatility of returns is huge
The stock market is not just about expected returns, but more about the risk/return ratio you get as an investor. A famous indicator called the Sharpe ratio measures the relation between your risk-adjusted expected return and the standard deviation of that return. Different investors would invest in differently risky asset classes, depending on their risk profile. Taking on more risk is usually rewarded with higher returns.
In the financial asset universe, stocks pass as one of the more risky asset classes. Therefore they are normally mixed in a portfolio with other asset types such as bonds and cash, in order to reduce the volatility of the portfolio by means of the lower risk of those other asset types, as well as risk diversification.
You can easily see why – during the currently raging COVID19 crisis, the S&P 500 managed to lose a third of its value in a bit less than a month:
It also rebounded quite a bit since then. Still, it is far from its previous heights and continuously makes for a lot of stress for those who are heavily invested.
Well, value betting is worse than that.
The volatility in a value betting strategy can be massive. In a stock market crash you could lose a third of your savings within a few months. Such a crash occurs two or three times in a generation. The thought of losing a third of your savings sends shivers down the spine of the average worker, used to the stable income granted by his paycheck.
In value betting, you can lose a third of your bank in a day. This has happened to me a few times. On each of those occasions I got that money back and more. Still, going through such days takes a toll on you. Of course, your starting bank is way smaller than your lifetime’s savings, since there is only so much money you can put to use in a recreational bookmaker. Therefore, the comparison to the stock market volatility is a bit unfair. But on relative terms, it can hurt quite a bit. Therefore, never bet more than you can afford to lose.
To get a clearer picture, here is an example of a recent drawdown I witnessed:
After 700 bets it was all back where it started. That might be a month’s worth of work or more. The large drawdown of more than €3000 occurred in less than a week. For most people (me including) this is hard to stomach.
This is how the graph looked like at the end:
As you see the story has a happy ending. And yet, you have to get through the first stage in order to reach the second one. This works only if you have enough capital to survive the drawdown. So, if you value bet, do expect the downward volatility and be prepared for it.
4. Tax and legal aspects
In many countries sports betting is restricted in some way or another, while investing in the financial markets is allowed or maybe even encouraged. I have outlined the reasons for this above. In other words, before you subscribe to a value betting service you have to ensure that the legal environment in your country allows you to make the most of it.
Mostly tax free winnings
However, a sweet benefit of value betting in most countries is that the winnings are tax-free. The reason for this is that if you are being charged tax on betting profits, you would also have to be allowed to deduct betting losses from your taxable income. Since the large majority of punters are losing, such tax arrangement would be a losing proposition for the state.
Of course, that is great news for the value bettor. In most of the developed world your profits from the financial markets could be taxed with anything from 10-15% to up to 35%. This is certainly an important factor to consider and one that usually favors value betting.