The World Cup has so far confounded the experts during many games. Might there be some lessons for investment we can learn from such events?
Having seen many of the large, historically successful countries fall to supposedly weaker opponents, the lesson is to carefully consider all possible outcomes rather than apply a high degree of certainty to your preferred or expected outcome. The odds of an underdog winning a football match are much higher than we believe, just like the chances of an investment view coming right precisely as you expect are much less than your instincts lead you to believe.
We are living in a world of uncertainty where luck (football?) or randomness (investment?) plays a much higher role than we’d like to think. Better to allow for a range of scenarios in your portfolio than to have excessive confidence in a small number of imprecise predictions.
Football pundits have consistently underestimated supposed underdogs and this World Cup has been a great example. One of the best investment books I’ve read was arguably not an investment book at all, Moneyball by Michael Lewis, which considers the strategy of a cash strapped baseball team manager, who solely considers the players statistics rather than looking at them. He managed to lead a team of misfits to great success because these players were often overlooked and therefore more easily available. Similarly, we look for differences in the data and the market’s narrative when searching for investment ideas.
A further lesson is to be pragmatic when things change. Russia came into the tournament off the back of a number of poor performances, but have so far played well, as a consequence, expectations must change. Similarly, when information arises which conflicts with our existing views we are happy to change our outlook rather than stubbornly holding on to our previous, now invalid, opinions.
An additional observation is how our maxim, ‘pick your battles’, was applied by England’s manager. While, obviously, it’s wise to attempt to win every game, some battles are better to fight than others. We think the same when making choices among potential investments. Where the gain from being right is less than could be lost if you are proven wrong, it doesn’t look like a good investment, even if you have a strong belief. England lost against Belgium who went on to win a difficult battle against Japan in the last minute and must now face Brazil. By not choosing to fight hard in that battle, Southgate can save his best players for what ought to have been easier battles in a weaker half of the draw.
This tournament has proven hugely enjoyable as games have swung back and forth as a consequence of goals and refereeing decisions. In our view, investment is also better when volatility is more normal. The period of ultra-low volatility while very benign was not very interesting, as higher volatility leads to better opportunities just as the unexpected leads to a better World Cup.
So, there are many lessons for investors from the World Cup, the reason being both areas are driven by uncertainty while views are more often driven by prejudice than fact.
David Jane is manager of Miton’s multi-asset fund range.