# Cheltenham Festival: Odds and the pursuit of value

#### Updated: Monday, 10 Mar 2014 15:34 | Comments

**By Barry McEneaney**

Finding the winner of an event is really only half the battle when having a bet. Unless punters obtain value in their betting activity, long-term profit is almost certainly unachievable.

**Value betting**

Profit and loss. The difference between the two in the long run is often marginal and it's imperative that bets placed represent value.

The concept of value may be somewhat nebulous, but it’s also very real.

Some gamblers still insist that it doesn’t matter, that “a winner is a winner” - only it’s not and the deluded idea that value shouldn’t be a major factor in any decision-making process can be easily disproved.

Let’s take the example of a horse in a race that is predicted to go off at 3-1. On race day the horse in question hasn’t been priced up by bookmakers at 3-1, he’s 1-5. Not even his most ardent supporters will consider backing him at this price. If the same horse has been priced at 50-1, even his biggest detractors will be compelled to back him. Value matters.

The point made is a facetious one. A scenario where a horse has a guide price of 3-1 and goes off at 1-5 or 50-1 is never going to happen. But it does establish the point that price and implied value are important.

A more realistic situation is where a horse you believe should be 14-1 was available to back at 20-1, but you’ve missed the price and he’s now 12-1. Your average stake is €10 and you disregard the fact that you’ve surrendered value by not getting the bigger price and back it anyway. The horse skates in. Happy days, a winner’s a winner, right? Wrong.

Even if you were to never back a loser, you’re not optimising your potential profitability. However, never backing a loser isn’t reality and you can see how damaging the approach above pans out in the long term, which is all that really matters.

Let’s say Punter A and Punter B each have a €10 bet once a week. They both back the same selection each week. Punter A obtains 20-1 about the selection, while Punter B gets on at 12-1. The selection wins four times over the course of a calendar year. Punter A has done brilliantly, he’s staked €520 and for a total return of €840 with net winnings of €320. His return on investment is +61.54%. Punter B hasn’t fared so well, he’s also staked €520, but for a total return of €520 and broken even for the year. The same selections can yield very different results.

An even more damning scenario is where you freely take 12-1 when 20-1 is still available. You’re effectively saying you are as happy to potentially win €120 as you are to win €200, which is nonsensical.

Value is always going to be subjective, but there has to be a line in the sand you won’t go beyond when making any investment, a point you won’t pass. If you’ve missed the value, you can sit on the sidelines and give the race a miss, but you should probably actively look elsewhere for value. By implication, if you’ve missed the value on one selection, value now exists elsewhere. You’ve just got to reach for the screwdriver, an imaginary one preferably, and attempt to re-calibrate your brain.

The Yoda-like wisdom of Johnny Giles probably sums it up best: “It’s about doing the right things for the right reasons, Bill.” Johnny’s terribly Zen.

Price is not of itself tied to value. Sometimes a 1-2 shot will offer tremendous value, while a 50-1 shot may represent poor value and vice versa.

Punters often describe something as a “certainty” or “worth a bet”, while others have “no chance”.

Everything has a chance. Only a tiny percentage of horses in the Betfair pre-race market go off at the ceiling price off 1000 (999-1) and I've never known one to start at the basement price of 1.01 (1-100). When you hear someone remark that a 50-1 shot has no chance, remember that its chance of winning is around 2% and not 0%.

If you believe you have analysed a race correctly, one of the best ways of obtaining value is to act as a bookmaker yourself and price up that race. The guide prices you come up with for the event are often referred to in the trade as a ‘tissue’. Once you've allotted a percentage to each runner you can convert to traditional prices and compare them with the professionals' prices.

If the 4-1 shot you fancied is trading at 2-1 the recommendation has to be to oppose it, via laying it or backing the other selections you now feel represent value. The latter approach is arguably more sophisticated. Laying a selection is effectively backing every other outcome blindly. If the selection loses, your return is the same, regardless if one of the runners you fancied or didn’t fancy scores. However, backing all the other runners, with stakes altered in accordance to which runners represent most value and least value, will yield better results if your judgement is correct.

If your relatively unconsidered 16-1 selection is available at 40-1 then you have to bet it because it represents value.

Again, both these examples are exaggerated, and if the discrepancy between prices is this big, either the bookmaker or the punter has got it wrong. But often the true price will be somewhere in between, which will still leave room to exploit a false price. Contrary to popular opinion, tissues aren't to be sneezed at. Sorry about that. I really am.

Odds comparison websites such as Oddschecker.com are important weapons in the punter's armoury. They compare prices between all the layers in a simple grid format. The importance of obtaining the best prices has already been established.

Dare to be different. You need to be something of a contrarian to survive in the betting jungle. The idea that you're betting against a bookmaker is a fallacy. You're betting against other punters. The original prices may be fixed by an individual or a small group of individuals, but the markets evolve until an equilibrium is reached. That equilibrium is established by the betting market and all those in it, namely the punters. The bookmaker acts as a broker to a greater or lesser extent, taking a cut or a rake, much like a casino. The image of a bookie taking a stand and laying a position to the hilt is a relic of the past thanks to the role played by computer software and the more rarefied business environment in which bookmakers exist. No CEO is going to stand before his shareholders and explain away their paltry dividend with the line, “we thought he wouldn't stay”. Betting exchanges and the potential for arbitrage have also limited the influence of bookmakers.

**Percentages, odds & prices**

A basic grasp of odds and percentages is vital to understanding how betting markets work.

The individual participants perceived chances in any event, or book, which will have one winner, make up a percentage of 100%. The chance any participant has can be converted from percentage form to odds form and back again very quickly.

The easiest example to use involves an event with two outcomes, although the principle is the same regardless of the number of competitors or outcomes in any fixed field. The term 'fixed field' is used because sometimes that number is unknown, the best example of this being ante post markets for events that evolve over time.

Novak Djokovic is playing David Ferrer in a tournament. You believe Djokovic has an 80% chance of winning, while Ferrer has a 20% chance of coming out on top. To arrive at the true odds divide each of the percentages into 100 (which is the total percentage of all outcomes). Djokovic’s figure is 1.25, while Ferrer’s is 5.0.

Both these figures are expressed as decimal odds, which users of betting exchanges will be well acquainted with. Bookmakers still express their prices using fractional odds (although many offer the decimal odds option online), but the decimal option has many advantages for our purposes.

The most important point to remember when working in decimal odds is that the unit stake (1) is always included, so every price must be bigger than 1. These decimal odds represent the potential return from every bet. The bigger the number, the bigger the return.

If we use a €100 stake in the Djokovic v Ferrer example, we see that €100 x 1.25 = €125 for the return on Djokovic, while €100 x 5 = €500 for the return on Ferrer.

Unlike decimal odds, fractional odds express the profit and not the return. Ferrer's 5.0 becomes 4.0 when the unit stake (1) is taken away. The decimal 4.0, expressed as a fraction, is 4/1 and a €100 bet at 4-1 earns a profit of €400. The payout, which obviously includes the stake, totals €500 which is the same return from the decimal example.

Djokovic’s 1.25 becomes 0.25 when the unit stake (1) is taken away. The decimal 0.25, expressed as a fraction, is 1/4 and a €100 bet at 1-4 earns a profit of €25. The payout, which includes the stake, totals €125 which is the also same return from the decimal example.

The Ferrer v Djokovic example used represented the true odds of a 100% book. In any sporting bet these odds can only ever be approximated, and are by their very nature subjective, as the factors influencing the outcome are too great and variable to assign an exact value or weight to, unlike cases involving a dice or a deck of cards.

Bookmakers never bet to 100% (bar the very occasional PR stunt for a high-profile event). And why would they? They need to bet over the 100% threshold to ensure a margin that provides them with profit and allows them room to make adjustments to manage their risk.

Our tennis match was an example of a head-to-head market with only two possible outcomes. In such markets, bookmakers generally bet to 106-109%.

Bookies’ margins are influenced by a number of factors including the number of possible outcomes (eg runners in a horse race), the amount of information available on the event, live TV coverage, the volume of trade anticipated and the perceived integrity of the product.

This explains why the margins in a live Premier League match are so low and why margins in a mid-table end of season non-league game are so big.

Bookmakers also manipulate the odds to create a favourite-outsider bias, whereby they lengthen the price of those at the head of the betting and contract the prices of the outsiders.

This is one of the main reasons why outsiders can be backed at much bigger prices on the exchanges - the medium is often a more accurate reflection of the chances of outsiders.

Conversely, bookies can rival exchanges on favourites and those at the head of the market on a frequent basis.

With the Festival in mind, consider placing more of your bets each-way. The place terms in many of the races are more favourable than would normally be the case. The true place market in a race with three places should be 300% (not factoring in any over-round) as there are three winners in the market, while races with four or five places offered should be 400% and 500% respectively. But the competitive nature of the betting market means it’s possible to obtain place terms in certain races which are superior to their natural probability. The market is essentially over-broke and the likelihood of certain bookmakers losing on certain horses in the place market is relatively high.

Finally, chasing the dream with that five-horse accumulator may seem like fun, but it’s rarely prudent. Multiple bets, including accumulators, are pushed aggressively by the bookmaking industry. They even offer ‘bonuses’ on many of these bets. Anytime a bookmaker offers a bonus you need to ask yourself “Why?”. Those who win huge sums from a modest bet make for great stories for bookmakers’ PR machines, but the fact they continue to apparently incentivise these bets should give you an idea of how profitable they are for bookmakers in the long run.

When you place such a bet, you’ve probably backed at least one selection under the odds. In doing so you’ll have committed the cardinal sin of sacrificing your best friend, VALUE.

*Follow @RTERacing all this week for the latest on Cheltenham*

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