It's all about expectations

When it comes to betting on sports or the markets, you can make outsized returns by finding situations when expectations are very low or high when recent evidence suggests it shouldn't be. Often times high or low expectations are justified and so being contrarian for contrarian's sake won't work. Great betting opportunities will present themselves when the crowd is slow footed in reacting to evidence of an emerging trend because it has been so used to the prevailing trend or gets caught up in hype. In such situations you get to make a bet at a very favorable risk/reward ratio. Such situations don't happen very often. You need to be very patient and objective when analyzing the facts. .

Take for instance the bet I made on Liverpool FC to win the Premiere League title this year. Odds makers had given Liverpool only a 1 in 4 chance of this happening. I saw this as a major mispricing for the following reasons: 1) In the last third of the previous season Liverpool were arguably just as good if not better than the crowned Champions Manchester City and even beat them head to head. 2) Liverpool's run of good form late last season allowed them them to make it to the prestigious Champions League Final and only lost because of 2 horrific errors by their goalkeeper. Despite the unfortunate loss, this likely gave Liverpool the confidence to believe that they are one of the best teams in the world. 3)  Prior to the start of the current season they made significant acquisitions (including a top class goalkeeper) and were dominating games in the pre-season. 4) At the start of season start Manchester City's top player Keven De Bruyne was seriously injured and expected to miss 2-3 months.

So, the evidence suggested to me that coming into the season Liverpool were arguably just as good as Manchester City yet odds makers heavily favored Manchester City to win the League title again and only gave Liverpool a 1 in 4 chance to win. This bet was a steal. The market was very slow in appreciating the major turnaround in Liverpool and just how good they are relative to Manchester City because it based expectations on the distant past rather than the recent past and present. With half the season remaining, Liverpool have a commanding lead in the league and it's now theirs to lose.

In my next post I'll discuss what I believe are the expectations of the stock market in 2019.