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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Millsy
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Millsy
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… Read more »
James
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James
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… Read more »
Alex Zelvin
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Alex Zelvin

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.

Alex Zelvin
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Alex Zelvin

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).

Bill
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Bill

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.

Toffer Peak
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Toffer Peak
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… Read more »
chattanooga
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chattanooga

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.

Alex Zelvin
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Alex Zelvin

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.

Mike
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Mike
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… Read more »
Alex Zelvin
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Alex Zelvin

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

Derek Carty
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Derek Carty
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… Read more »
Millsy
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Millsy
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… Read more »
chattanooga
Guest
chattanooga
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… Read more »
Derek Ambrosino
Guest
Derek Ambrosino
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… Read more »
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