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Investing and the World Cup

Thursday, July 12, 2018

There have been many attempts to link World Cup football to various activities in a country.

From our local experience we know that taking time to watch World Cup matches has an effect on national productivity.

This, of course, is more pronounced in countries that are actually playing in the World Cup and the further into the World Cup a country goes the greater the distraction.

Other linkages have been made between the results of World Cup matches and incidences of domestic violence, alcohol consumption and attendance at work the day after a game. One of the more curious linkages has been the outcome of World Cup matches against the next day stock market returns.

The argument here is that the collective mood and emotions of investors have an impact on their trading pattern that then impact stock market returns. So, a team that wins a World Cup match will have stock market participants that are more upbeat and that mood will be reflected in their trading patterns.

One of the things to appreciate in these discussions is that it is very difficult to distinguish between a correlation and causation.

This is because the World Cup is a so infrequent and a team’s performance in each tournament is unique so it is very difficult to generate enough statistical data. Some of the linkages may be caused by the World Cup but others are simply correlated and could be chalked off as coincidence.

The World Cup match last week between Brazil and Belgium would surely have captured the imagination of local sports fans.

One interesting statistic is that Belgium had up to this point nine different goal scorers at the 2018 World Cup, excluding own goals. Only Italy and France in 2006 and 1982 respectively have ever had more in a single tournament, with the record being ten.

On the other side, prior to the quarter-final match up, Brazil’s Neymar had recorded 48 touches in the opposition penalty area which was, at the time, 16 more than any other player at the World Cup.

These two statistics can start a debate on whether Belgium won because they played more as a team and Brazil lost because of their reliance on Neymar. Recognise again that these linkages are correlated to the result but it takes a more in depth analysis to determine the cause of Brazil’s defeat and Belgium’s victory.

Portfolio construction

We can, however, take some lessons from the World Cup and some of its matches in terms of how we craft an investment portfolio.

Some World Cup teams rely on a couple of super stars, or one big star for their overall success.

In the example of Brazil, at least statistically, there was an overreliance on Neymar to get the ball into the opposition penalty area.

When a star player is on top of his game, the other players in the team seem to look good as well even if many of the players involved might be below average.

If you juxtapose this analogy into a stock portfolio you may find a portfolio with a big winner like, say, Apple and a number of other companies that are really below average but when they all come together the portfolio has still done reasonably well.

A portfolio constructed in this manner is likely to have a bit more randomness to its performance and return as it is heavily skewed based on the “star’s” performance of lack thereof.

There are other options to portfolio construction and it is useful to return to the football analogy to make the contrast. A bunch of average or seemingly below average players on a team can win matches.

We have seen this with the performance of a number of so called “under dog” teams at this World Cup. This occurs for one simple reason—football is first and foremost a team game.

So the super star player may really be a super star but the rest of his team has to string together a few passes before the ball can get to him and when it does he sometimes needs to pass to someone else for a goal to be scored.

One likely outcome of having the super star player is that most of the play is directed to or through that player. This makes it easier for the opposing team to anticipate what is likely to happen and so they can plan for these eventualities and manage the situation to their ultimate advantage.

The team of average players has an entirely different strategy.

They need to seek ways to link together that makes the whole greater than the sum of the parts.

This is also a fundamental theory of portfolio management. It is the reason why it is considered better to own a portfolio of stocks as opposed to placing your entire investment into one stock. You don’t bet on the performance of the “star” stock but you build a portfolio of stocks that in combination can produce a result that is less variable and more consistent.

Appreciating this dynamic is important in a world where we often chase after the big winner. A frequent question is “what is a good stock to own” as opposed to “how can I put together a stable team of stocks”.

A stable team is less exciting and in some cases may be outright boring but when it comes to your financial security it’s the result more than the excitement that matters.

Role of luck Compartmentalising is important in terms of knowing what you want to accomplish.

For a World Cup you can relish the allure of a star player and support a team on that basis. However when it comes to your money it is better to build a good team (portfolio) of average players what can produce reasonable and consistent results over time. For many Germany may be the team that best defines this portfolio objective.

Yet Germany also flopped at this World Cup.

Germany’s reality brings me to the final World Cup/investing lesson.

There is always an element of luck. Based on shots on goal you would have expected Germany to score far more goals than they actually did, that they didn’t show the importance of getting the correct mix in your portfolio. Growth stocks and dividend stocks are to a stock portfolio what attack and defence is to football. You need to have both working properly together in order to get the result that you are seeking.

Then at the end of it all do not underestimate the role that luck plays in success.

Last weekend’s quarter finals saw the winning team score two goals each. None of those winning teams had more than three shots on target. Overall the four winners scored eight goals from just ten shots. This is an amazingly high conversion rate. The four losers scored three goals from twenty one shots (Brazil was one from nine).

You would expect that in a knock out round the team that is behind would leave more room for the opposition to get better chances. Adjusting for when the scores were level, the four winners had three goals plus an own goal from four shots on target and twenty nine in total. The losers had one goal form four shots on target out of a total of 14 shots on goal.

The lesson is simple. Fortune favours the brave and there is always an element of luck in success.

For the investor that means that you position yourself so that you can remain invested through the up and down market cycles. If you are brave through the market cycle and try to maintain a balanced portfolio throughout then with a bit of luck you will achieve your objectives. Unlike a World Cup the investor’s game doesn’t end unless you decide to end it, so time is on your side.

Ian Narine can be contacted at
[email protected]


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