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Risk and reward in horse racing

Talking with a relative who works in the superannuation business, the topic of risk and reward came up. Very interesting topic with regard to superannuation, especially for those who are in the habit of saying stiff like "too complicated - don't understand it." Boy - you better make it your business to understand it especially if you have all your super going in to the "default" fund with your superannuation company.

This is not the forum for getting in to detail about this but you do need to understand it so make it your business to find out. Ignore this advice at your peril. Here's a good starting point that illustrates why you may be disadvantaging yourself in the long term: http://www.superguide.com.au/superannuation-topics/default-investment-option

Risk and reward is also an important consideration if you are trying to make a few bob out of punting on the horses.

For example, if I want to have little risk I can expect an infinitesimally small return. If I want to have negligible risk, I may take $100 and invest it with one of the big four banks and at the tend of 12 months they'll pay me about $5.50 in interest for having that $100 tied up for 12 months. Is there a risk the bank will fall over? Well, I guess so if there is a catastrophic event in the world's financial system but this risk is ameliorated by the government guarantee on bank funds (up to a certain limit of course). So the risk could rightly be considered minimalist.

The country could be taken over in a invasion by a foreign country and then the whole banking / government system would collapse so there is that risk. How small? You'd probably be with me and say almost zero but we are looking at pure risk so it does have to be taken in to account.

That same $100 I could take and put on a horse racing at Port Macquarie today and get $4.00 about it on Betfair and stand to get 300% interest for around 90 seconds investment, assuming it is a mile race. So instead of $5.50 for twelve months, my make is $300. BUT of course the risks are far greater. The horse could be having an off day, I may have read the form wrong, the trainer may be just as surprised by a form reversal as I am, the horse could miss the start, the jockey could fall off, the horse might get bumped in to by another one that costs it all chance, the horse may be blocked for a run at the vital time of the race, it could be taken wide at the turn and cover too much extra ground, any number of things could happen when you are running a dozen 750 kg horse tightly together in a horse race.

So the risk to my $100, as you can see, escalates beyond belief compared to giving it to the bank for a year. The reward is exactly the converse of course.

A lot of folk, especially those starting out, believe that level stakes betting is a low risk high return strategy. It isn't of course but the belief is firmly held because level stakes bets are easy to comprehend, they are essentially a "control" strategy BUT neither minimise the actual risk nor realises the maximum potential profit. A very low risk level stakes strategy uses 2% of the available betting bank, allowing for a losing run of 50 before the bank is exhausted. In contrast, a very high risk strategy uses stakes of 10%, allowing for just 10 losers before the punting bank waves goodbye.

We favour a progression staking approach based on extremely conservative principles ( http://www.racerate.com/MY_staking_plan.htm) strictly following a minimum odds approach.

The probability of wining a single bet (win or place depending on odds) is enormously greater than cracking a first four, trifecta or quinella because the more horses you need to "salute", the greater the risk factors multiply. More things can go wrong, the combination of those things and the result they create is accelerated. Don't ever lose sight of that immutable fact.

Also worth noting is the increased risk of betting early on markets like the Melbourne Cup - months before the final field is known. Rarely, and I mean RARELY have I seen what I would consider "good value" in any of these markets. Only 24 horses currently racing in Australia and around the world will be able to run. Never lose sight of that. The odds of actually getting in to the race are quite remote.

This isn't the AFL where every team, no matter how poorly they are performing, gets to play every weekend.

If you are to be in the the small overall % of people who regularly make an annual profit out of racing, the key is to understand your long term strike rate, now you can capitalise on that with a structured investment approach and develop and enormous element of self discipline that encompasses an understanding of risk and reward. Good luck.

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