What Is Value Betting?

Introduction

Value Betting is considered to be the only true way to get ahead in any form of investment, whether it be investing in shares, buying (or selling) a lot on the Forex, backing a team in a football match, or backing a horse.

It all just boils to the essential question of "Is my Risk less than the Reward?". If it is then one should go ahead with the investment and if it isn't then one should walk away and look for another investment opportunity.

Let's have a look at some examples.

A Small Town in Norfolk

In Norfolk there's a casino in Great Yarmouth. No doubt they will have a roulette wheel, I don't know. I've never been.

Sitting down at the table, looking at the wheel one will see thirty seven slots; all numbered. Eighteen will be coloured red, eighteen will be coloured black and there's one, numbered 0, which is green.

Looking at the odds on offer for the Red/Black bet, the gambler is offered evens. There's almost a 50:50 chance of one choosing the right colour and this almost seems like a good bet.

But, is it?

That one solitary green means that there's eighteen chances in thirty-seven of the ball landing in the coloured slot of one's choice. That works out at 18 divided by 37, or 48.6% chance of getting this right.

Therefore one has a 51.4% chance of losing a bet which pays only evens. Evens works out at 50% (we can worry about calculating this later).

So imagine you're there backing red and you've convinced me to sit next to you backing black. Imagine that we're both betting £1 stakes. Over the course of the first few bets what will happen is that one of us wins, gets the £1 win plus the stake back and the other will lose £1. Nothing, overall has happened. We're just transferring money from one person and back.

Until that one time the ball settles in the green 0 slot. This will happen, of course, on average one time in thirty-seven bets. The croupier rakes both one pound tokens from the table and we're, collectively, that little bit poorer.

The evening continues and we're sitting there chatting, moving one pound chips from one to the other and back again and then, another zero. And we're collectively four pounds down.

What we've just seen is the casino's Edge in action.

If I have a 48.6% chance of success, the same as you then it means that the casino has the remainder which is almost 97.3% (excuse the rounding errors in the calculations, if you're wondering why twice 48.6% is 97.2%).

This means that the casino has an Edge of 2.7%. Or to put it another way, on average the bank will win 2.7% of whatever is on the table with each spin of the wheel. And all they have to do is to keep spinning that wheel and the profits will ultimately flow one way: towards them.

Yes, one of the pair of us could come out with a profit on the night but, overall, that 2.7% edge will surely mean that over a good number of spins the bank will have made more than either of us as they will slowly take our stack of chips, drip by slow drip.

One could play Blackjack against the house but they've made sure that they have a small edge in their favour. One used to have an advantage if one could card count but they've countered that by having more than deck in the shoe and that they shuffle the deck before it's exhausted.

A Large City in Nevada

Las Vegas. Who hasn't heard the song sung by Elvis and his determination to win a fortune with a heart of steel?

Let's look at the American roulette wheel. Well, it looks rather much the same and the odds on offer for the Red/Black is the same: evens.

But it's not quite the same as the casino in Norfolk: there's another green slot on the wheel. This one is marked 00, making thirty eight slots in all.

Not much difference you say? But look at the maths. If one is getting evens on a bet in which one has just an 18 in 38 chance of success then the Bank's edge is 5.2%.

So, if there's a thousand dollars on the table each spin then $52 will, on average, make its way into the casino's coffers. And imagine thirty such spins an hour, twenty four hours a day and then multiply that up by the number of tables. Well, is it any wonder that they can afford to have Tom Jones in a residency?

And that's not even looking at the one armed bandits, which are well named, as the bank's edge is something like a whopping 30%. They don't mind if someone comes along and drops a million dollars from their slot machines; they'll have made that dozens of times over already and it won't be long before they've made that up.

This all down to that little thing called the Edge.

A Roll of the Dice

As any skoolboy kno, the most common total when rolling two dice is seven. This will come up, on average one time every six rolls of a pair of dice. A total of six (or even eight) should come up five times every thirty six rolls.

Four times every thirty six rolls (or one in nine) will see a total of five showing and so on until the chance of rolling a two is one in thirty six.

This is one of the reasons why the orange Bond Street set in Monopoly is the most profitable set on the board. The chances of rolling a double three or double four is quite high for the jailbirds, that will land them straight on Bow Street or Vine Street, respectively. If you don't believe me: challenge me to a game and give me the orange set and I will let you have any set of your choice; at least for the short time it will take me to beat you.

So if we're rolling a pair of die and I challenge you £1 a roll. You win if you get a total of seven, and I take your stake if you don't. Now to make the game fair I have to pay out at a price of 5/1.

What would happen in this scenario is you would lose a number of rolls and then you'd win one and you'd get six pound coins back and we carry on. In fact, we could carry one all night and, all things being equal, we'd end up pretty much even until the sun rose the next day.

Now, instead of offering you 5/1, as I should, I offered you 9/2 instead then what would happen is that over the course of the evening you'd still win the same number of rolls but, but after a time you'd realise that your stack of pound coins was slowly migrating to my side of the table.

Clearly offering you odds that are in my favour means that I have the edge and it's therefore obvious that you shouldn't be taking part unless I was offering you something like 11/2 when the Edge would be in your favour.

And this is what value betting is all about. If one can determine the chance of something to happen and if the odds on offer is greater than the chance says then, and only then one should get involved.

A Pair Face Up

Here's a quick example. Let's get a deck of cards and I shuffle them and I give you two cards face down. I ask you to pay £1 to enter the game and the rule is that if you get a pair then I will pay you at 13/1.

That, I say, has to be actually more than fair because there's thirteen cards in each suit and, therefore, surely a fair price has to be 12/1, but I am offering you 13/1 for a bit of sport.

So, do you take the challenge and sit down for an hour of turning two cards, shuffling, two cards and so on, paying £1 each time?

If you say Yes; thinking that you have the Edge then think again. There are fifty two cards in a deck, that we know. The first card can be anything, but for the purpose of illustration let's say it's the King of Clubs.

I pay out at 13/1 if the adjacent card is also a club. But how many cards are there in the deck? Well, there's fifty-one left and there's now only three Kings left. That means that your chance of success is now only three in fifty-one. That's one chance in seventeen.

It suddenly dawns on you that the odds on offer should be 16/1 and not the 13/1 offered that you accepted. The Edge is clearly in my hands, not yours.

Further Afield

We've just discussed value betting working with simple examples. The examples of the roulette wheel, the cards and the Monopoly board are good examples of events which have a probability that is easily pre-determined.

But what about matters which aren't as simple to nail down a probability figure? Such example could be running a business and if one works out that a new business venture has a 20% of going wrong costing one £100,000 if it does, but if it does work out and in which case it would bring in an extra £20,000, does it make sense to go on with it?

Of course one should ask where the estimates of 20% and 80% (the bit that's not 20%) come from and this is from well paid management consultants who are supposed to calculate such a thing from experience (surely a euphemism for pulling the figures from their back passage). But assuming that these figures are right we can get out a pen and the back of a fag packet and work out the following.

The chance of failure is 20% and if it does come to pass then it will cost £100,000. Multiply one by the other and this comes to £20,000. Now, the chance of success is a healthy 80% and then it would earn me £20,000 and multiplying one by the other this comes to £16,000.

So we have, on one hand, a risk of £20,000 and on the other hand a gain of £16,000. This is clear; the Edge is not in your favour and you should decline the business venture, than the management consultants for their report and pay their over-inflated invoice.

Horse Racing

By now you're getting the picture. One needs the Edge. If one doesn't have the Edge then, slowly (or not so slowly) but surely the money moves one way: the wrong way!

So the first rule of any punter should be: Do Not Bet Unless One Has The Edge.

There is one book that I recommend on the subject and this is Dave Nevison's "Bloody Good Winner".

The book is a fast read and it's soon apparent that this was one man's search for value. The first part of the book describes how he punted without having an Edge and it shows that he wasn't getting anywhere until he ran into someone who explained the principles of Value Betting, in other words: Betting With An Edge.

The rest of the book shows how he uses a set of ratings which has determined the value price of each horse (this is called The Tissue) and then he only went on when he found a price higher than the tissue price suggested.

What he basically did was to find a horse that was priced at 6/1 which he knew had around a 20% of success. That horse, he knew, should have been priced at 4/1 but because the bookmaker had given it an inflated price this gave him an advantage: the Edge.

Then, and only then, he would go in and place his bet.

UK Horse Racing

Moving onto UK Horse Racing and onto the ratings provided.

The important Value (or Tissue) Price is given each day within the ratings and in the Daily CSV file.

I would recommend using the Daily CSV file to make the selections as one could quickly knock up a suitable Excel (or equivilent) macro to filter the selections that one wishes and, indeed, this is what I do each day myself.

These two images show where to find the Value price within the PDF and the CSV files.