Wednesday, June 03, 2009
Why daily fantasy sports contests are a better investment than the stock marketPosted by Alex Zelvin at 2:18am
I firmly believe that daily fantasy sports contests are a better investment than the stock market. Actually, I should clarify that. I firmly believe that for someone who has had an overall winning record in daily fantasy sports contests, they are a better investment than buying and holding a portfolio of stocks in the future. Obviously, fantasy contests of any sort are not a good investment for losing players. And other than in cases where sites offer "freerolls" or "overlays" to generate new business, daily fantasy contests will be a negative sum game for the "average" player, while the stock market is probably a positive sum game.
So what exactly am I saying? I’m saying that daily fantasy contests have lower variance than buying and holding a portfolio of stocks. That means that your past results give you a much better idea of whether you’re making good picks in daily contests, and that your future performance will be a lot more consistent. If you’re a winning player, you can count on a much higher percentage of winning days, months, and years than in the stock market, and the downswings should be much smaller relative to the growth of your bankroll.
To make any kind of fair comparison, we need to set up some parameters. For the stock market, I’m talking about a portfolio of U.S. common stocks. The best comparison to that in the daily fantasy world would be playing a bunch of heads up contests each day, with similar (but not identical) lineups. Each day, each stock may go up or down. The various stocks in the group will show moderate (but far from perfect) correlation with each other in their daily performance. Each day, you may win or lose each fantasy baseball contest. Your results in each contest on the same day will show moderate (but far from perfect) correlation with each other.
Let’s look at stocks first. What percentage of days will my portfolio of stocks go up? I don’t have the data available, but I suspect it’s around 50.5%. What percentage of months? I’m going to guess around 52% or 53%. Years? This one I actually remember reading about … the U.S. stock market has gone up in 57% of years. That’s an old statistic, but probably still not far off.
How about fantasy contests? What percentage of days will I come out a winner? Let’s assume that I’m a very good player, going up against average competition. I’d guess that I’m coming out ahead at least 55% of the time. If that’s the case, and I’m playing almost every day, what percentage of months will be winners? I think estimating 75% is conservative. Years? Again being conservative, I’m going to say 90%. I suspect the actually number is above 95%. Even the best stock pickers would have trouble getting that kind of results.
Assuming that I’m right about these percentages, the question is why this would be the case. Do daily fantasy contests have some characteristics that the stock market lacks that make them easier for skilled players to beat? I think they do. And I think that those characteristics have to do with what makes markets of all sorts more or less "efficient." Here are the three factors that I think going into creating an inefficient, or easily beatable market or game:
New markets: Daily fantasy contests have only been around for about two years. Most of the people who will ultimately be most successful at them probably don’t even know they exist yet. The stock market has been around for hundreds of years, and many of the best and brightest people spend their lifetime studying how to select stocks that will be winners. In other words, daily contests provide weaker competition.
Closed markets: Each daily fantasy contest is a "closed market" in the sense that entry is limited to a fixed number of participants. Once two people are entered in a heads-up contest, nobody else can enter that contest. That means that sometimes you’ll find yourself in a contest against only weak participants. In the stock market, stronger "competitors" can always get involved.
No Scalability: The size of "bet" that can be made in each fantasy contests is limited. Each participant in a $33 contest can only invest $33 in that contest. In the stock market, "bet size" is theoretically unlimited. That, combined with the openness of the markets, means that a single person with unlimited funds and omniscience can theoretically remove ALL of the inefficiency or profit opportunities.
On a separate note, I'd like to invite readers to take a look at the new site I launched this week in conjuntion with Dave Hall of Rotoguru. The site is Daily Baseball Data, and will showcase a variety of tools for players of fantasy baseball formats that use daily transactions. The initial three tools are:
1. MLB Weather Dashboard - Hour by hour forecasts for all games displayed on one screen.
2. Batter vs. Pitcher Report - Showing history of matchups for all of the day's games.
3. Sortable Statistics - For a variety of daily transaction contest formats.
Compete against Alex and other players in one day fantasy baseball contests at Fanduel or visit his site, Daily Baseball Data, which has daily hour by hour weather forecasts for all games on one screen and batter vs. pitcher matchup data for the full day's schedule.