How to make a quick buck
*Disclaimer: gambling bad, investing good!
Before you continue reading, you should know that I do not endorse gambling. For the most part, and for the large majority of the world's population, gambling is a destructive addiction. It is by nature illogical, irrational, conceited and wrapped in a hubris that will consume you and your wallet. Bar that "one lucky guy" you always hear stories about, there is a higher than likely chance that you will walk away with less than you arrived with, and leave with a broken soul. There is no better way to put it.
That being said though, investing is an activity that I do endorse. On the surface, both are deceptively the same, with four very significant differences: knowledge, thought, adaptability and experience! If you strive to understand all the variables involved, know and understand your own risk profile, be honest to yourself about your current financial situation, pay enough attention to the task at hand and manage risk as a top priority, opportunities to improve your financial situation are aplenty. Remember, "the first rule of investing is to never lose money" - Warren Buffet. Opportunities exist everywhere, be it the stock market or Motor-sports.
Opportunity: Formula 1
One important lesson that i have learnt through my experience in trading CFDs (derivatives / stock market) is that you must be diligent in your analysis and be confident in the decisions you make. The ripest opportunities are not a daily occurrence, and if you fail to recognise them and act upon them, they will pass you by. One such profitable opportunity that I have noticed is in Formula 1 racing. It is rare for any sport for the risk and the predictable outcomes to diverge in this manor and become so displaced. I believe it is a rare phenomena that is confined to the nature of Formula 1 as a competitive (highly mechanical) sport.
Last season I couldn't help but notice how lopsided the results were (see picture to the right). Of the 19 race meets for the season of 2013, 13 were won by Sebastian Vettel of Red Bull Racing-Renault. In fact, he consecutively won the last 9 races.
From my light research of 2013's season, I believe the Red Bull team had found a significant edge against all the other teams. Even with all the very strict rules and procedures of F1, Red Bull had allegedly managed to engineer a method of traction control, possibly through their suspension - with traditional forms traction control banned from F1. This loophole allowed Vettel a significant 2.5 second per lap advantage over every other driver in the competition. In motor-sports, races are won and lost in the milliseconds. A 2.5 second lap advantage times the 50-66 laps per race, elevates Vettel into a league of his own. It got so bad towards the end, that the crowd was actually booing him during the podium ceremonies. Sure, it was bad for the sport because it detracted the entertainment value, but what was left in that void was an opportunity for profit.
I was not familiar enough with F1 back then, but I'm sure as hell not going to let the same opportunity get away from me this season.
2014: Mercedes results table whitewash
Fast forward to 2014, with all the new rule changes and regulations favouring less fuel consumption, smaller 6 cylinder engines, ERS/KERS (Kinetic Energy Recover Systems) which harvests electrical energy from braking and the introduction of forced induction, Red Bulls edge from 2013 was lost.
Enter Mercedes. The German manufacturer, with its impressive knowledge and experience in working with turbos, had created a power unit significantly more powerful than all the other teams. From what I can gather, I believe it is because they have split the turbo practically in half, so it can separate the intake from the very hot heat of the engine. Mercedes have apparently been testing this type of power unit for the last 2 years in secret, so it will be next to impossible for the other teams to quickly implement the same kind of technique before this seasons end. Some claim this has given the Mercedes duo a 100 BHP advantage which I'm inclined to agree with.
In tandem with their turbo technology, they have been able to move their gearbox closer to the engine creating a better centre force of gravity. This then makes the car handle a hell of a lot better. Take a look below in the video as Sky sports explains:
4 races in, the Mercedes boys are currently close to 1.5 second faster per lap than the rest of the field. This is definitely not the 2.5 second advantage Vettel had last season, but it is still too large an advantage in motor-sport for anyone to meaningfully compete against.
This once again, opens the motor-sport up to a unique position for investment. The Mercedes duo Lewis Hamilton & Nico Rosberg are almost undoubtedly going to fill up every slot of the results table for 2014. Their technology advantage will not be replicable this season (unlike the blown diffuser situation in the past). It will be a season where Hamilton & Rosberg compete for slots 1 & 2 and the rest of the field will be fighting for the last podium spot. All that is left for me to do is to split my bets proportionally and manage risk by hedging.
Sure, the odds are quite low due to the obvious advantage Mercedes hold, and with every race odds decrease even more as people start to catch on, but the advantage Mercedes holds is just too strong to ignore. For me, I am putting larger amounts on, even though the return is not that large by "gambling" standards. Through my analysis, I believe that the risk is acceptable for the return. Which leads me to my final investment lesson for this blog post: Take what you can get, no matter how small the return. A gain is a gain. Although I have been thoroughly enjoying watching and following F1 this season for the first time, it is another chance to create a new income stream. You must realise that this opportunity is unique to this season of F1 and this tactic will only be around for this season. Hell, it could disappear in the next few races IF the other teams pick up their game.
To turn to Warren Buffet again; the most successful investor in the history of this universe, his average yearly return is only about 20% (albeit he's investment pot is far larger than you'll ever be able to imagine). If he can only manage to secure (consistently) a return of 20%, we should be happy with whatever we can get.
If this interests you, follow, subscribe and share as I will be posting a diary / log of all my investments throughout this season of Formula 1, along with my insights, tactics and positions.I will publish a blog post before / after each race!
Coming up! My results from race 5: Spain!