Money
A lesson in strategic investing from professional sports players
Summary
- When it comes to sports, this distinction is very clear in our heads, but many of us fail to make this distinction when it comes to investing.
Matthew Syed was the number one English table tennis player for many years. Since his retirement he has been a journalist and a writer. In a book titled Bounce—The Myth of Talent and the Power of Practice, he recounts an interesting experience of playing tennis with Michael Stich, a German tennis player who won Wimbledon in 1991.
Syed wanted to use this occasion to carry out a little experiment. He asked Stich to serve at maximum pace. This was 2004. It had been a few years since Stich had retired from playing professional tennis. Nonetheless, Stich was one the fastest servers that tennis had seen and Syed was curious to see whether his own reactions “forged over twenty years of international table tennis," would enable him to return the serve.
Stich’s first serve went past Syed’s right ear “with a speed that produced what seemed like a clap of wind". Syed then asked Stich to send down another serve. At the end of it, Stich had served four straight aces. As Syed writes: “He told me that he had slowed down the last two serves to give me a fighting chance. I hadn’t even noticed."
This story leads to a few interesting realizations. First, skills in one area aren’t necessarily replicable in another similar area. At a very basic level, table tennis and tennis are very similar sports, where one player serves, the other player returns the serve, and then they rally. Second, Syed, having played a sport at an international level, thought that he would at least be able to return a serve against a Wimbledon champion. It would have been interesting to see how a similar experiment in table tennis would have worked. If one were to Indianize this example, no college-level cricketer would entertain the delusion of facing Jasprit Bumrah, even if Bumrah chose to bowl with a tennis ball.
When it comes to sports, this distinction is very clear in our heads, but many of us fail to make this distinction when it comes to investing, and harbour the delusion that we can emulate some of the most successful investors out there.
As Michael Kemp writes in The Ulysses Contract—How to Never Worry About the Share Market Again: “Too many people simply assume that they have the skill that it takes to be a successful investor. In fact, it’s a worldwide delusion on a mass scale… countless stock market punters reckon that they’re in with a chance to emulate [Jim] Simons or [Warren] Buffett when it comes to investing."
Why is this the case? The answer lies in the fact that the lack of skill in sports is immediately obvious when an expert plays a non-expert. If this writer were ever lucky enough to face Jasprit Bumrah, his lack of skill at batting would be obvious after facing the first ball itself, even if Bumrah decided to simply bowl a slower ball, instead of bowling at his usual full pace. So, there will be an end point at the end of the first ball, and this writer will come out looking stupid for having decided to face the number one fast bowler in the world.
But investing doesn’t work like that. The final result isn’t always immediately obvious as it is in sports. As Kemp writes: “Even bad investment decisions fail to quell this delusion…Each time you play a dud tennis shot, it’s immediately and embarrassingly obvious that you’re no good. But, when you make a dud investment, the outcome is typically disconnected (by time) from when you first made it." And even after a stock becomes a dud investment, the investor might feel that there is still a good chance of the price bouncing back or their recollection of how they ended up investing in that stock might have changed.
Of course, most such retail investors hoping to emulate the investing greats do not have the necessary skill set or the time or the motivation to sit and learn the processes and methods followed by the greats. And this is why so many retail investors, who really have no idea about what a company does or where do its earnings come from or does it really have a moat around its business model, end up buying stocks, simply based on stock tips given by finfluencers on social media and those appearing on TV. They even pick up stock tips from their friends and acquaintances.
Now, in an environment like the current one, where the stock prices of almost anything and everything have gone up, this seems like a successful strategy to follow. And so many retail investors continue to play the game because the results have been in their favour, at least in the short-term. And in their minds, tomorrow is going to be like today. And so the story continues.
Vivek Kaul is the author of Bad Money.
