The investor’s chief
problem- and indeed his worst enemy- is likely to be himself Benjamin
Graham
I have always enjoyed sport and
particularly football. I blame my father’s adulation for Liverpool FC. There
will be some of you reading this who will already be saying, “Oh dear. A sports
fan. I cannot relate to him. I will stop reading!” However please bear with me
for a little time. There is something everyone can learn* from being an armchair
sports fan that will make you a better investor.
Allow me to explain. Before I got
into share investing, I developed a keen interest in running my own Fantasy Football team, an online game run
by the English FA Premier League. This is an incredibly popular game that is
offered free and has grown to well over 5 million players by the 2019-20 league
season. It is replicated by many newspapers too, where the prizes are usually
more lucrative.
The game is fairly simple. The
tactics are less so. You have a budget of £100 million and you use that to buy
a squad of 15 Premier League players. That must include 2 goalkeepers, 5
defenders, 5 midfielders and 3 forwards. Each week, players score points based
on their actual performance. Points are awarded for saves (goalkeepers), not
conceding (defenders and midfielders) as well as assists and goals all
players). Bonus points are awarded for the players that perform best. When
buying a team, the best and usually most known players (typically forwards and
goal scoring midfielders) are the most expensive whereas the weaker and unknown
players are the cheapest. You are only allowed a maximum of three players per
Premier League team (so bang went my idea of replicating the Liverpool team…)
You are allowed to trade one player “for free” each week, with a points
deduction if you trade multiple players. The skill is to buy a team with the
right balance of high quality high performing players and “value” players that
will outperform. Catching a player at the right time will often be very beneficial
as momentum is key in football (the forward who hits a purple patch of goal
scoring; the team that learns how to keep clean sheets). Any of this starting
to sound familiar?
One of my friends used to
describe it as “competitive admin”. Admittedly it does attract a certain type
of person.
The truth is however that trading
and investing in shares is both a business and a game. By learning how to
develop an “edge”, you stand a better chance of beating the Market and making
good returns. I know someone who works in marketing major newspapers and he
told me that it is the same consistent group of individuals that win all of the
Fantasy Football style leagues that
the newspapers run. Some of them do it as a full time occupation. They have all
developed a market-beating edge.
I found that after my first
season, I learnt how to play the Fantasy
Football game to the point that from 2.5 million players (back then) I
ended that second season in the top 6,000. It was the realisation of (a) the
similarity to share investing and (b) the fact that if I could perform well at Fantasy Football I potentially could
translate these skills into actually making some money. So that began my
journey into share investment.
So what did I learn from Fantasy Football that helped me as an
investor?
(1) Having a good understanding
of players and analysing the players you pick is very helpful indeed in picking
a winning team and reduces (without
eliminating) the risk of picking dud players. So learning and analysis is important.
(2) Staying “on it” every week is
vital. If you forget to pick your 11 out of your squad, if you miss injuries or
players going out of form or fail to choose the right team “captain” (scoring
double point), you can very quickly start to underperform. So regular
management of your risk on the downside is crucial. This is not the same as
over-trading. Actually you could not put automatic sell (stop-loss) orders on
players in Fantasy Football, which is
a great tool in the real life investor’s armoury. Ironically my Fantasy
Football performance has dipped the more I’ve got into share investment as
I’ve just had the time to be “on it” like I used to….
(3) Being ruthless with
under-performers. Although there was the odd maddening player who used to have
a good week and then two off weeks before scoring a hat-trick again, this was
actually quite rare. Usually a decline in performance tended to indicate a new
pattern of loss of form. Much better to get rid quickly and bring in a new
rising performer. In a well-chosen squad of 15, you will always have 2 or 3
perennial underperformers. What you do with those underperformers is key to
your performance. Interestingly I knew someone who won one of the newspaper
competitions and he used to regularly incur points deductions by bringing in 3
or 4 new players to replace under-performers. This action (in the faster moving
world of Fantasy Football where the
profit warning equivalent came on you much quicker) led him to reap dividends.
Getting emotionally attached to players (who are let’s face facts people after
all) is dangerous.
(4) Being constantly on the lookout
for “value”. There is an interesting trend in Fantasy Football that after about 4-6 weeks of the season, most
competitors have got a good array of high performing players in their squads.
To stay ahead of this pack, you need to be identifying the forward who is about
to hit a new vein of form or the mid-table promoted team that concedes few
goals (with bargain bucket defenders scoring well). The sooner you snap them
up, the better chance you have of picking up points before the competition. So
screening for rising stars is recommended.
(5) Listening to and looking what
other competitors are doing, but forming your own cold judgments. It’s very
easy to get swayed by the fact that everyone has got (say) Harry Kane in their
squads but actually have you looked at how many assists and bonus points he
gets compared to the better value Mason Mount?
(6) Not letting your emotions get
the better of you. Unexpected stuff happens. Your double point scoring captain
misses a penalty and then gets sent off leading to a double negative points
score(ouch!). The manager chooses to “rest” your star man. Someone clatters
into your top points scorer and he gets substituted on 59 minutes (depriving
him of that crucial point for staying on for an hour). You can get cross and
give up. You can do “rage transfers”. You can take big risks and bring in
players who might win big (but probably won’t as they are in a relegation
scrap). You can hang on to players through their short term injury phase (never
a good idea) on the basis that they have performed so well for you already this
season. You can get scared of “taking losses early having to move out 2 or 3
that week due to the fact that they’re crocked. The people who do really well
at Fantasy Football are cool and
unemotional.
(7) Your star performers will
over-contribute to your points haul during the season. Learning to spot them,
popping them in your team and “run” them early (such as making them captain
regularly) is very beneficial.
I could go on and I’m sure any Fantasy Football anoraks would come up
with ten more similarities. However, one trend does emerge from the above. If
you want to perform well, you must first choose wisely and then have a clear
management plan for dealing with both players who will over-perform and those
who under-perform. If you fail to be cool and clear-headed, you will not
perform as well. Psychology is so important.
I am going to continue the theme
of psychology in the next blog, applied to actual trading and investment. I’m a
practical person, so will tell you what I’ve learned from experience rather
than just teach the theory.
*This blog is published subject to this disclaimer which you must read and which you are deemed to accept if you carry on reading.
*This blog is published subject to this disclaimer which you must read and which you are deemed to accept if you carry on reading.
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