The beautiful game has certainly evolved and matured over time. Players
have improved – running faster, shooting harder, passing more accurately
and dribbling quicker. But at the same time, new defensive strategies have
been added to contain them – offside traps, pressing, triangular passing
etc. All of this has resulted in a dramatic drop in the number of goals
scored in any given match. In 1890, the average game had 4.5 goals (by both
teams together). Today, that has dropped to about 2.5 goals per game. The
loss of two goals per game since the beginning of the twentieth century and
the trend towards a more defensive game makes every incremental goal that
much more meaningful.
As such, a penalty kick, which has roughly an 80% chance of resulting in a
goal, can turn a match. When a penalty kick is taken, the ball travels at
about 100 kms per hour and reaches the net in less than 0.4 seconds, so
goalkeepers must choose their action before the kick is taken as there is
no time to adjust once the ball is on its way. No wonder penalty shots are
notoriously difficult to stop.
researchers looked into penalty kicks in order to find the optimal strategy for goalkeepers. They studied 311
penalty kicks in top leagues and championships worldwide. Roughly speaking,
they found that the kicks were equally distributed with about one third of
kicks to each of the left, centre, and right of the goal. They also found
that goalkeepers that decided to stay put saved 60% of the kicks aimed at
the centre, much higher than the percentage of saves made if he correctly
guessed the direction of the ball and dove that way (less than 40%, which
includes occasional saves of kicks directed at the centre but still saved
after diving left or right).
Considering this save percentage and equal probability of the kick
direction, the optimal strategy for goalkeepers is to actually stay in the
centre of the goal. Yet, goalkeepers rarely do so. Their bias was clearly
to act, jumping to the right or left about 94% of the time. Rationally
speaking, this behaviour does not make sense. After all, these are
professionals, paid and incentivized extremely well to save goals and win
matches. Why did they dive right or left most of the time when staying in
the centre more often would produce better results over time?
The curious researchers conducted a follow up survey to probe the mind-set
of 32 top professional goalkeepers. They found that, in essence, goalies
are psychologically biased for action. By diving left or right, the players
reasoned that at least they were making an effort and would feel less
regret than if they just stayed in the centre and then watched the goal
being scored either side of them. In other words, their bias to act led to
worse overall results, but they felt better about a poor outcome because at
least they tried to do something. The lesson: When it comes to the actions
of men, psychology and emotion tends to trump rationality. Herein lie some
important parallels for investors.
The downside of being hardwired for action
The greatest flaw in short-term investing is the belief that great business
performance is always linear. Time tends to push out the weakly convicted
and creates opportunities for those with a long-term perspective. A patient
approach to portfolio management is not practiced by many, but it tends to
work over the long haul because it is aligned with how the world really
works. Don’t just take our word for it. Numerous studies have shown that
performance and portfolio turnover tend to be inversely correlated over
time. Patient investors tend to outperform the day trading types.
recent study concluded that only highly patient investment strategies, when combined
with high Active Share portfolios – where holdings differ substantially
from their benchmark – outperform, on average. According to the study, this
successful group represents a very small percentage of all active
investors. In large part, misaligned incentives, driven by short-term
relative performance and benchmarking, prevents most managers from
implementing this approach in their investment strategies. Yet these
real-world findings have clear implications for today’s active vs. passive
We believe it is important to see the world as it really is in order to
stack the odds in one’s favour. Like many aspects of life, it turns out
that capitalism and investing is also beholden to the “80/20 rule.” A
minority of individual stocks account for most of the stock market’s total
returns over time, because only a handful of companies create real
long-term wealth. The key, in our opinion, is to be patient with such
compounders so one can benefit from magnitude in capitalism.
This also explains in large part why portfolio turnover and returns tend to
be inversely correlated. It’s hard to keep up when you sell the Starbucks,
Amazons and Berkshire Hathaways of the world early-to-midway through their
respective lifecycles. Yet, just like the goalkeepers in the study, there
is an almost irresistible urge for action when investing. Today’s
increasingly “always on” world is only making matters worse. In the U.S.,
the average holding period of a stock on the New York Stock Exchange was
about seven years in 1940. Now the average holding period is
less than nine months.
This is no argument for complacency. The world is constantly changing and
companies are dynamic. Facts do change and one should be monitoring
developments and taking action if warranted. But just like the goalkeepers
in the study, the bias for more action than is necessary will likely lead
to subpar results. In order to be more successful, investors must be
comfortable with being uncomfortable at times.
Don’t just do something, stand there!
A recurring pattern in investing is the fact that most participants tend to
“buy high” when the news is favourable and “sell low” when conditions
become more challenging. Often, their returns could have been higher if
they had just stayed put. But investors are human, just like goalkeepers,
and when it comes to action, psychology overpowers rationality.
How can investors combat this unhelpful behaviour? First, by appreciating
and acknowledging this wealth destroying bias, and second, by making a
commitment to take less unnecessary action.
Watching the daily stock market action increases the urge to over-trade –
it is as if the market was shouting in your ear, “Don’t just stand there,
do something!” Yet, most investors would probably improve the odds of
success over time if they took the opposite approach. “Don’t just do
something, stand there!” This is very counterintuitive. But in both
goalkeeping and investing, the evidence shows that resisting the urge to
“do something” more often increases the odds of success. So, as you watch
the World Cup, look out for the goalie who has the courage to stay in the
centre instead of diving to save a penalty. I’ll be cheering for him and
wondering if he’s also a great investor!
Felix Narhi, CFA, is Chief Investment Officer and Portfolio Manager at PenderFund Capital Management.
He works alongside David Barr, Pender’s President, in setting the
direction of Pender’s overall investment strategy. This article first
appeared in the
Pender blog. Used with permission.
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