Monday, 23 July 2012

Final analysis topics.....

I’m conscious of the fact that there are still two outstanding analysis topics to be covered this Summer that guys have asked me to look at. However, I’m also conscious of the fact that people have started writing to me today looking for my help with building portfolios for next season and therefore, I think it’s time to draw a line under the analysis of topics and start getting into a bit more detail with the subscribers. So, I’ll cover both topics off in this blog post and instead of doing spreadsheet work, I’ll tell you my thoughts in words with no pictures!

Before I start, the eagle-eyed amongst you may have noticed the comment at the top right stating the service is closing on the 31st of August.  It was always my hope that I would get enough members to be able to close before the season starts and although I may not meet my target number for this season, I’m happy enough to close the service before the first bets. I don’t like people joining midway through the season and although people got lucky last season who joined later (the first month was the only losing month!), I’ll be closing the doors at the end of August.

I know a few people have written to me this Summer and have said they’d join nearer the start of the season. I’m going to be quite strict and if people want to squeeze in before the season starts, they know the deadline now. Of course, if I get a small rush of members, I’ll close the service if my target number of members is met, so the end of August may be too late to join. ;) 

OK, the first topic I want to cover is a question posed by Mark. It was around how much leverage you can get if you combine the systems in a portfolio?

As you will have seen by now, when I’m doing analysis on the blog, I always combine the systems together, look at the profitability and drawdowns and then work out betting banks for the whole portfolio. This is basically including any leverage you’d get as if you sum up the drawdowns of each individual system, you’ll get a higher figure in most cases.

What I would say is that you need to be careful with the combined systems. I know already from the emails today that some people are gravitating towards the higher combined systems as they are the best UK systems and I’ve no issue with that. However, you also need to remember that 7-22 is a filter on 7-21 and 8-21 is a filter on 7-21 and 8-22 is a filter on 7-22. Hence, a team appearing on 8-22 appears on all 3 systems before it too.

Hence, if you combine these 4 systems, you don’t get too much leverage at all.  This is OK though as the betting bank you’ll need will take into account the fact you don’t get much leverage anyway, so you don’t end up worse off at all, you just end up playing a bigger betting bank than you would necessarily think.  Usually, if you play 4 systems with some bets overlapping, you can get a lot of leverage but in this case, these 4 systems are so correlated, when 8-22 hits a losing bet, all 4 systems hit a losing bet.

As I say, there is nothing wrong with this and if you play the game properly, your betting bank will take this into account, so you’re no worse off. What you might find though is that if you only played system 7-21, you can end up with a similar level of ROC as I’m not sure what the other 3 systems add.

Of course, if you want to gain maximum leverage, you’ll be running with a portfolio of systems that are uncorrelated (e.g. 7-21, 6-32, STOY and E2-E7) and you’ll find that the betting bank needed will be much lower than the individual betting banks of all 4 combined. Of course, this portfolio would carry much more risk than the portfolio of (7-21 to 8-22) but then again, if you only need half the bank size to follow it, then you only need half the return to make the same level of ROC overall.

Anyway, my overall suggestion for leverage is don’t even think about it. Pick the systems you want to follow for the right reasons (the systems you think will win you money!) and then sum them together, work out what betting bank you need overall for your portfolio, what sort of target ROI you’re aiming for and check you’re happy with the target ROC at the end. Much better you do this than find systems which give you great leverage, you follow them, they do rubbish and you wonder why you’re following systems simply because they provide good leverage!

The other question is one from Grant around the monthly returns. Grant’s question was simply around why were the monthly returns so much smoother in the second season than the first season for the combined systems?

I had a quick look at this and it’s a simple answer really but if I was try to show it mathematically, I’d end up in a massive hole I think! 

It’s simply variance I think.  This season, there were 61% more bets on system 6-21 than last season but a reduction of 33% of bets on systems 6-22 to 8-22.  System 8-22 for example had only 42% of the bets it had last season.

When you think of the way the staking plan works for the combined systems (8-22 is a 6pt bet and 6-21 is a 1pt bet), all that has happened is that you have a much greater number of bets but at lower average stakes than the first season. Hence, the correlation between the returns of the systems reduces and in the first season, when 7-22 and 8-22 had a good month, by definition, the whole portfolio had a good month. Likewise, when these systems struggled, the whole portfolio of 6 systems struggled.

Last season was different. There were a few months last season where 6-21 had a bad month but the more selective systems saved the day and in the months where the selective systems struggled, system 6-21 had a great month and saved the day. Hence, for portfolio betting, it’s much better for a smoother journey if you aren’t putting all your eggs in one basket every month. 

As I say, it’s a very simple explanation and knowing Grant, I’m sure he wanted chapter and verse from me to prove this but then again, knowing Grant, he can do it himself, so I doubt he cares what I think anyway!  ;)

I think that covers off all the analysis topics I wanted to cover this Summer. My next job is to work with the subscribers who need my help to come up with portfolios that they are happy with for next season.

What I aim to do over the next 5-6 weeks when I’m working with the subscribers is to do regular blog posts on some of the portfolios and some of the ideas being generated. Of course, if any subscriber thinks they’ve come up with a unique way to play the bets and doesn’t want it shared with others, I won’t do but I’m hoping I find enough nuggets of information that I can share with blog readers to keep the blog ticking over until the season starts.

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