The title of this article itself is enough to provoke objectionable opinion from any number of people, especially those not involved in any form of wagering. To call betting on the races or anything for that matter an "investment" is just as irresponsible as it is incorrect. It's gambling, plain and simple... or so the argument goes.
However the reality is that betting on the races (punting) can be the most profitable form of investment that most people ever have access to in their lifetime. By definition it's easy to class betting on the races as gambling, but it's equally easy to classify it as investing, especially if you are good at it (I will leave you to check the definitions for yourself).
On the other side of the coin, when you consider the high failure rate of start up businesses, it's easy to argue that putting your life savings into becoming your own boss or some other venture capital opportunity is just as much gambling as it is investing. It's no different in nature to punting.
It is true that punting carries more risk than leaving your money in a term deposit or even Sharemarket managed fund, but a fundamental principle of investing is risk-return trade off. That is, low levels of uncertainty (risk) are associated with low potential returns, while high uncertainty (risk) is associated with high potential returns.
That means punting isn't an investment for everybody, but when you break down the numbers it more than stacks up. They key lies in a punter's ability to turn over their investment capital many times during the year, therefore magnifying the returns compared to traditional forms of investment.
A COMPARISON OF INVESTMENTS
Let's say you have $100,000 to invest and you're prepared to let that capital work for at least 3 years before drawing on it.
Managed Sharemarket Fund
The median annual return over the last 3 years of the top 50 performing managed funds in Australia is 12.5%. Mind you, with hundreds of funds to choose from there's no guarantee that you'd be invested in one of the top performers. Some of the better known funds have delivered significantly lower returns. However for the sake of this exercise, let's work with a generous 12.5% return.
I've also made the following assumptions:
- You obtained a 100% rebate on entry fee (can be 4% to 5% of the upfront investment)
- Management expense ratio (MER) was a competitive 1.5%
- There's no dividend income along the way, all gains are capital gains
- All returns are reinvested
After 3 years your $100,000 nvestment would be worth approximately $137,000.
If you then sold out of this investment with a capital gain of $37,000 you'd also be liable for capital gains tax. Using the discount method and assuming a marginal tax rate of 37% then capital gains tax would be approximately $6,800.
At the end of all transactions, your $100,000 investment has grown to become approximately $130,000.
Rather than invest your $100,000 into a top performing managed fund, you decide instead to invest it into punting.
- Staking: A conservative collect target to help protect capital during naturally expected losing runs leads to an average bet size of 1.0% of the bank... or $1,000 in the first year.
- Number of Bets: This can vary a great deal depending on how much time is spent betting and the strategy chosen. I will use a moderate 20 bets per week (1,040 per year) which is easily achievable betting 2 days per week (3 at most.)
- Profit Edge: Can vary significantly, but again I will be relatively conservative and use a 3% profit on turnover edge.
Following is the progress of your investment over 3 years:
- Year 1: $100,000 starting capital - $1,000 average bet x 1,040 bets = $1,040,000 turnover. Multiplied by 3% POT = $31,200 profit.
- Year 2: $131,200 starting capital - $1,320 average bet x 1,040 bets = $1,372,800 turnover. Multiplied by 3% POT = $41,184 profit
- Year 3: $172,384 starting capital - $1,720 average bet x 1,040 bets = $1,788,800 turnover. Multiplied by 3% POT = $53,664 profit
Ending capital: $226,048
Nett gain: $126,048
The punting fund no doubt carries more risk than the managed sharemarket fund, but the nett gain of $126,000 compared to $30,000 more than compensates (remember the principle of risk-return.)
Also remember that 20 bets per week with a 3% profit edge is a relatively conservative operation. There is potential for upside on both the number of bets and profit edge.
- 35 bets per week at the same 3% profit edge would deliver a nett gain of $269,000 in 3 years.
- 35 bets per week an a 5% profit edge would deliver a nett gain of $597,000 in 3 years.
- Even if you had a much more selective 10 bets per week and made a corresponding higher 6% profit on turnover, the nett gain after 3 years is still $125,000 vs $30,000 in the managed fund.
They key is that with punting you can turn you upfront capital over multiple times during the year. In other words, you can make the amount you have available work much harder than in a traditional investment.
Of course the risk is there with punting that you could lose in a given year or in multiple years. However there is also risk of loss in any form of investment. You only need to look at sharemarket returns over the long-term to see that. There are plenty of examples over time where a given 3 year period has produced negative returns.
While there is naturally more risk, the level of returns that can be achieved by investing capital into punting cannot be matched by any other traditional form of investment.... it's a total mismatch.
Of course the challenge is in the individual actually being able to achieve that profit edge, even those conservative figures used in my examples. Most punters do not achieve these results, but that in itself does not diminish the attractiveness of the investment opportunity. Most fail due to fundamental mistakes in strategy, execution and self management... not because the nature of the game makes it impossible.
With the right knowledge, tools and information these results are readily achievable and the truth is that once you have a handle on how to be a winning punter, the risk is not anywhere near as great as some people might think. That doesn't mean it's guaranteed or easy all of the time... results can be volatile even when you are doing everything right. However the long-term picture is a very attractive one.
That brings me back to earlier assertion that punting is by far the most profitable investment opportunity most people will ever have access to in their lifetime. What else gives you the opportunity to earn anywhere from a 100% to 500% return on your capital within 3 years? And that's based on very realistic assumptions of betting volume and profit edge. It doesn't matter whether you have $100,000 to invest or $1,000... the returns are all relative and punting is streets ahead of other opportunities.
There's no doubt that it requires the right mindset and a level of knowledge & skill, but they are all things that can be learned. The key point is that it's achievable... all it requires is a commitment to learning, continuously improving and becoming the best punter you can be.