Certainties
In Horse Racing
Death
is a certainty for all of us. Some get there quicker
than others but it is one of the very few certainties
in life. You can bet on it. Insurance companies do -
even knowing they'll eventually lose the bet.
It's
also a certainty that the Julia Gillards, Tony Abbotts
and Bob Browns of this world all eventually float to
the top of their respective political septic tanks and
either bore us, confound us with their dumbness or amaze
us us with their nanny State mentality. That's just
the way of it and why we have to watch it every night
on the news and get angry. (Well, I used to - don't
any more - a total waste of time. I mean, living here
in Tasmania I can tell you not enough happens in the
space of a day to fill in 30 minutes of news so why
do they bother? Once a week is enough - anyway, I digress).
Let's
get back to insurance companies because they interest
me a lot lot more. Knowing that you are going to die,
with certainty, why do insurance companies
bet you won't? Of course they don't really - they just
bet from year to year that you won't die now.
All insurance companies employ people called actuaries
which is a great name for a risk assessor. That's all
they do. Assess risks.
Sounding
familiar? Perhaps we should all call ourselves racing
actuaries. Isn't that what you do? Assess risk in every
race? These insurance company actuaries study statistics
like there is no tomorrow, knowing full well that that
is true too in many cases. They get all this Government
collected data and make a determination that based on
"averages", a male will live for x number
of years and a female for y number of years
given that all things remain equal.
They
are then able to put out a scale of life insurance premiums
that are age and health and occupation dependent so
that, overall, their respective insurance companies
can make a profit each year.
Of
course, they also invest these collected premiums in
other money making ventures, to cover off on the number
of claims they will have to pay out. That's how they
work. It's why there are all sorts of exclusions in
policies, like car racing, private aviation, sky diving
etc etc because the actuaries know those things increase
your expectancy of dying, by x% - admittedly a small
margin but enough to change the percentages to make
it an unacceptable risk that you will die now. It's
why you pay more if you smoke cigarettes. The risk is
greater that there'll be a payout this year!
It's
also instructive to note that in many policies you are
often excluded from a payout if your inevitable death
occurs from "acts of war, civil insurrection, riots".
I guess the human track record is not too bright in
these areas and the risk is too great.
According
to Wikipedia: "Actuarial science includes a
number of interrelating subjects, including probability,
mathematics, statistics, finance, economics,
financial economics and computer programming. Historically,
actuarial science used deterministic models in the construction
of tables and premiums."
Ah
huh - you are getting the drift here! The insurance
companies bet against a certainty knowing there are
mitigating circumstances that happen along the way to
minimise their exposure. Things like people pay and
pay and pay and then, for some financial reasons, drop
out because they can no longer afford the premiums so
all those premiums that were paid along the way in "low
risk years" were clear profit with no payout
at the end. This
happens more than you would believe.
So,
to sum up, these insurance "punters" bet against
a certainty, knowing there will most likely be a payout,
but making enough along the way to offset it when it
happens.
Well,
do you want to write the rest of this article now or
do you want me to? Anyone with half a brain would realise
this is absolutely no different to the approach we should
be taking with our gambling activities. No matter how
good your statistical analysis is, the day will come
for certain when disaster will strike.
That's just the way of it.
It's
why even with good strike rate betting ideas like The
Grail and CounterBet, we KNOW the day will come when
things just go wrong. A total wipe out will occur -
AND IT DOES!. With The Grail we estimate it will happen
three to five times a year - maybe less with CounterBet
- but we know it will happen.
The
trick then, and it's not really a trick, just actuarial
common sense, is to employ a money management plan that
ALLOWS for these disasters to happen without destroying
the long term financial position of gain. If you have
done the statistical analysis over the long term on
your punting idea and really know that in the long term
you will finish in front, you can bet, like the insurance
companies do, that the disastrous and inevitable
run of outs won't occur now
but at all times
make arrangements for the future for when it does.
The
importance of money management can never be over emphasised
enough. Be smart. Be just like the insurance companies.
Gather the statistical data - it's freely available
- assess the risks -make a value based financial decision
but all the time be aware that you also need financial
money management skills to succeed LONG TERM.
Interestingly,
the motto of the UK based Institute Of Actuaries is
"making financial sense of the future". If
they can do it, why can't you?
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