This article is one in a series looking at Jack Schwager’s classic investment books. The goal is to study interviews with famous traders and apply their wisdom to daily fantasy sports.
Larry Hite ranks right up there with Ed Seykota as one of the most popular trend-following system traders of all time. He has a stellar track record of success and offers one of the most insightful interviews in the first Market Wizards book.
Hite starts the interview by joking that he might be the only person to work as an actor and scriptwriter as a way of funding his trading career. From there, he dives into more serious topics like backtesting, avoiding excessive risk, and understanding that losing bets are not necessarily bad ones. Let’s explore each of those three concepts and see if we can find some wisdom to apply to the DFS world.
Backtesting Your Approach
The point is that because people are the same, if you use sufficiently rigorous methods to avoid hindsight, you can test a system and see how it would have done in the past and get a fairly good idea of how that system will perform in the future. That is our edge.
Hite explains that he has systematically tested his systems across many different types of historic market data. The knowledge that a system has been profitable in the past gives him the confidence that it will likely be profitable in the future. That is where Hite finds his edge in trading, and it is also how we can find our edge in DFS.
One of the most powerful ways to utilize the FantasyLabs Tools is to create your own Player Models, the performance of which is automatically backtested for your convenience. For instance, the Bales Model has produced a Plus/Minus of +6.4 for FanDuel hitters historically, so when we use it we have backtested data indicating the type of results the Model might yield moving forward.
Creating backtested Models is important for one to be a positive expected value FantasyLabs subscriber.
Assess Your Risk
Because we know that we don’t know. No matter what information you have, no matter what you are doing, you can be wrong. I have a friend who has amassed a fortune in excess of $100 million. He taught me two basic lessons. First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you can’t quantify reward, you can quantify risk.
Despite the fact that our backtested models have a proven record of production, it is still possible for anything to happen on any given slate. Hite is pointing out that risking enough to alter your lifestyle on any individual trade is foolish. Whether we are talking about trading or DFS, you can’t always measure the potential upside of an idea or opportunity, but the potential downside is always zero. That’s why bankroll management is important.
While the Labs tools are outstanding when it comes to testing your system and making sure you are focusing on the best possible players when using our Lineup Builder, it is up to you to manage the way you allocate your DFS bankroll and seek to mitigate variance. Understanding any given slate could be a loser is critical to using the tools successfully, and never risking enough to alter your lifestyle is how you enable yourself to survive bad slates. And when you have a bad slate, remember that resilience is essential to DFS success.
The Four Quadrants of Lineup Decisions
There are really four kinds of trades or bets: good bets, bad bets, winning bets, and losing bets. Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually you have to come out ahead.
Hite explains that most people aren’t able to distinguish between bad bets and losing bets. They are also likely to misjudge the difference between good bets and winning bets. In any activity with an element of chance involved, results can fall into any of the four combinations of good and bad bets versus winning and losing bets.
In the DFS world, most players don’t put enough stock into the amount of luck that factors into a given play. They don’t understand that managing luck is a skill. Just because a particular hitter has a big night does not mean that he was a good play. Likewise, a pitcher who gets shelled in the first inning was not necessarily a bad play. Being able to distinguish the quality of a play from its outcome is the fastest way to take your DFS game to the next level.
The best way to identify whether a particular player was a good or bad play is to check his ownership percentages using our DFS Ownership Dashboard. By comparing how popular a player was in the higher- and lower-priced tournaments, you can get a solid understanding of whether the sharpest DFS minds thought he was worth the risk. Sorting the table by Volatility Rating and GPP Grade will quickly isolate the best and worst plays of the day.
Hite and DFS
Like any good systems trader, Hite is all about rigorously backtesting systems and then trusting that they will produce positive results. By taking advantage of the tools that Labs offers and implementing your own risk reduction policies, you can be a systems trader with your own DFS model. Combine that with the ability to separate the results from your process, and you will be on your way to becoming a DFS Market Wizard.