Why daily fantasy sports contests are a better investment than the stock market

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.

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Comments

  1. Millsy said...

    I don’t disagree with you, Alex.  However, the difficulty here is for a person to rationalize whether or not they’re a “good” player.  Similar to other sports betting or any gambling, people make irrational decisions despite the numbers they may have at hand.  Millions still play Blackjack, despite the odds for the House.  There’s excitement in winning that, just like there is winning a daily contest (or a weekly, yearly, etc. contest in Fantasy).  I think this is a place where we can use the term “slippery slope”.

    While you admit that most of the players that would be winning these matches are not currently playing them, it’s likely that enough of them do to make ‘investing’ in this a bad idea for most people.  And becauase this is gambling, and it has to do with sports, people aren’t likely to admit they’re not very good at it.  So while you’re encouraging the ‘good’ players to participate, the delusional bad players are also being encouraged.  Perhaps this allows the good players to take advantage…but as an investment tactic, it’s zero sum (plus a small fee, I’m sure). 

    The other difficulty is the huge swings that can take place with a 50-50 shot of winning (all equal).  If you’re good, you say 55% winning, 45% losing.  That’s all fine, but the swings that are taken from a loss are the full investment.  So while the expected value may come out slightly above, usually these types of risky investments are left for corporations, rather than someone investing in their personal portfolio.  The point of investing in the stock market is to allow a safe, slow-growing investment.  With the stock market, going ‘down’ usually means something in the realm of 2 or 3% of your portfolio.  Each time you lose a fantasy contest, you lose 100% of that.  I’m not convinced the assets are really distributed well…especially if you’re planning on picking the same players for your multiple teams.

    So, for a select few, this could be a good idea.  Projection systems are at a point where you could win more than 50% of the time against someone who doesn’t use one.  However, that’s a quickly-correcting situation with some serious up-and-down swings in the intestment.

  2. James said...

    No offense, but it seems like every one of your articles is really just an advertisement for your draftbug website.  I would do the same if I were trying to promote a website, but as a fantasy fanatic who is trying to dominate my leagues, these articles are of no use to me.

    The sentence that is the crux of your article “for someone who has had an overall winning record in daily fantasy sports contests” is funny.  Worded otherwise, “If you have a winning record playing poker, you should play poker rather than invest in the stock market”.  Think about it for a minute.  The more competitive the daily contests become, the lower your returns will be.  I’m sure that is well and fine by you if that leads to a profitable website for you, but your returns, and everyone else’s, will go down.

  3. Alex Zelvin said...

    Millsy – Great post.  I agree with almost all of what you said.  The one thing that I think is way off is your statement that portfolios of stocks typically will only go down 2%-3%.  Also, to reduce the variance of daily contests, people should only be risking a small fraction of their bankroll in each contest.  Assuming proper bet sizing, I still think the fantasy contests have far lower variance than the stock market.  Everything else you said is spot on.

  4. Alex Zelvin said...

    James – No offense taken.  Or maybe just a tiny bit of offense.  I realize that my enthusiasm for daily contests in general (and Draftbug in particular) probably sometimes makes me cross into a gray area where I’m doing a little too much ‘promoting’.  At the same time, I try to be fair by including my largest competitor (Snapdraft), and I try to provide posts that are useful for players of daily games (the daily picks columns I did the past few weeks) or thought provoking enough to make people think or debate (this week’s post).

  5. Bill said...

    I really enjoy this site, but I’m getting tired of the blatant pimping of draftbug.  For the reasons you list at the end daily fantasy competitions are completely different than the stock market, particularly in scalability.  Please do us a favor and stick to the baseball analysis that almost all of us are here for, not the finance.

  6. Toffer Peak said...

    1. I agree with the others, the constant advertisements for the niche daily fantasy baseball games are a distraction from the rest of THT’s quality writing and analysis.

    2. I agree with Alex that daily sports betting does have a lower variance than the stock market; the problem is that that’s not very important. If you want to reduce the variance of your investments then buy bonds, then your variance is zero. The bigger problem is that sports betting is a zero sum game (with a cut taken by the middle man) whereas the an investment in the stock market is a wealth producing activity (so long as the population of the market continues to increase and/or becomes more efficient at production). Yes, you can make money at sports betting if you are suffieicnetly better than average at it but as we know from research (and the stock market) betting markets can be quite efficinet.

    3. That being said I believe there is still opportunity to be a sufficiently better than average sport better in baseball. Just look at the amount of ignorance there is in statistical tools that will allow you to get ahead; Pythagorean record, xFIP, wOBA, UZR, etc.

  7. chattanooga said...

    no offense, Alex, but this article shows a total ignorance of sound financial principles.  I’m sure that you feel like DFC’s may be a great income stream for you, but I don’t think you’d want to make any long-term retirement plans or asset allocation decisions based on this “strategy”.  Your article is akin to rationalizing sports gambling as a career choice.

  8. Alex Zelvin said...

    chattanooga – I realized when I wrote this article that it was going to rub a lot of people the wrong way.  I believe that’s because many people have been fed a series of questionable principles and assumptions about how financial markets work.  I encourage those who disagree with me to comment here…but to explain exactly WHY they think I’m wrong, rather than dismissing my ideas without really thinking about the similarities (or differences) between various types of markets and without thinking about what actually defines the difference between speculation and investment.

  9. Mike said...

    I’m going to agree with Bill and James.  If Alex is paying THT for the opportunity to promote his site, then so be it.  But frankly this just stinks of a really awful advertisement.

    As for the numbers on the stock market, they are incorrect as far as my quick research can tell.  Since 1871, the S&P 500 has gone up in 72% of years.  If we cut it to the “modern era” only (i.e. 1900 to present) like we do with baseball, it went up in… 72% of years.  If you assume there was some kind of correction during the crash of 1931, then from 1932 to 2009 it went up in… 73% of years.

  10. Alex Zelvin said...

    All – Point taken. I’m not interested in writing articles that offend or irritate our readers!  In future, I’ll avoid specific mentions of Draftbug in my articles, and will mix in a variety of more ‘general interest’ topics, although I will still tend to focus on various daily transactions formats.  – Alex

  11. Derek Carty said...

    I just wanted to jump in here.

    I can’t comment on whether or not daily baseball leagues are a better investment than the stock market.  Probably to my own detriment, I know very little about the stock market, instead choosing to focus my brainpower on baseball.

    I do, however, think Alex makes some good points, and I think that there is money to be made for people who know what they are doing (and fun to be had for anyone who is playing a free or low-limit game), although I do think Millsy makes a good point about delusional bad players.

    As to this being a distraction from the rest of THT’s quality writing and analysis, I have to disagree.  Daily leagues and players are growing in number and stature, and we think it’s important to have someone on the team to talk about these games.  We brought Alex in because he’s proven to be excellent at these kinds of games.  He finished in the top five in RotoHog’s inaugural 2007 year and finished first in 2008 (out of tens or hundreds of thousands of participants).  We brought him on specifically to talk about these kinds of games because he is a bonafide expert on the subject.

    For those who don’t play in daily leagues, these articles probably aren’t of much interest to you.  In this case, simply skip over it.  We’re trying to provide a wide range of content because we understand there are many different kinds of fantasy leagues and formats.  If daily leagues aren’t your thing, every Wednesday, simply skip the daily league article.  We’ve got a lot of other great content that likely applies to you, with a lot more in the works.

    As always, if you have any questions or suggestions for things you’d like to see, please don’t hesitate to shoot me an e-mail.

  12. Millsy said...

    Just for clarification, I wasn’t offended by the article.  Just thought I’d add to discussion.  I actually didn’t even know about daily leagues like this until I read these articles, and have contemplated getting into it a little bit (though, my time constraints may not let me be very successful).  I disagree with the notion that these articles are ‘unnecessary’ or do not add to the Fantasy analysis.  The daily leagues are a different beast, and given Alex’s qualifications, I don’t have a problem with analysis about this stuff.  All in all, THT is a site I read more than ESPN.

  13. chattanooga said...

    alex, I think you should consider scrutinizing your work a little more thoroughly before making the type of statement that your title does. For instance, ” 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.”

    and then to make the statement: “I believe that’s because many people have been fed a series of questionable principles and assumptions about how financial markets work.”

    when you buy stocks, you buy an asset.  part of a company, with rights to the profits that the company makes.  That stock has intrinsic value, though sometimes those values are skewed. 

    when you play DFCs, you are gambling.  you are not “purchasing” anything.  It is a bet that you can pick players better than the other people in your pool.

    Gambling can provide a great ROI, as you have noted. Yes, some people do gamble on the market.  A vast majority do not.  Using unsubstantiated statements only muddies the waters.

  14. Derek Ambrosino said...

    Some remarks from THT Fantasy’s resident Marxist:

    The bigger problem is that sports betting is a zero sum game (with a cut taken by the middle man) whereas the an investment in the stock market is a wealth producing activity (so long as the population of the market continues to increase and/or becomes more efficient at production).

    Very little of the stock market’s activity produces wealth. Most of it is just redistributive. Just sayin.

    Yes, some people do gamble on the market.  A vast majority do not.

    Actually, this is untrue too. For example, we know about the sizes of investments in credit default swaps far outstripping the actual value of the corresponding investments. In fact, I heard Satyajit Das estimate, on Planet Money earlier this week, that only roughly 3% of the total market is invested in actual goods or investments, while 97% of the money invested is in speculation of some sort or another.

    Now, practically speaking I do agree that DFCs aren’t necessarily a viable long term, high stakes investment option, save but for a very few. But, let’s not in the process of making this point elevate the stock market beyond a parlor game either – to paraphrase Das again the only proven ways to succeed in the market are luck, inside information, and brute force (sounds like the casino industry to me). One’s structure perhaps makes the risk more tolerable than the other – although that’s not even true either.

    …Investing in the market in the form of an SP500 portfolio or something is somewhat analogous to going to a casino with a ton of money and playing one credit on a penny slot machine over and over for years. At the end of the day (or may days’ actually), your rate of return is likely to be somewhere in the vicinity of plus or minus 7 – 10% percent. But, this activity doesn’t characterize the entire spectrum of potential casino gambling activity as safe and moderate any more than citing the performance of a low risk mutual fund accurately reflects the overall risk or volatility of playing the market.

    As far as the value of these columns, I say variety is the spice of life. As Derek said, these games are growing in popularity. I haven’t really taken them up yet, but perhaps we should all be heeding Alex’s advice and getting in when the inefficiencies are most robust. As readers, simply skip what doesn’t apply to your interests.

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