Tales of the unexpected

Thus far the World Cup has confounded the experts during so many games. This week we consider whether there might be some lessons for investment from such events.

Having seen many of the large, historically successful countries fall to supposedly weaker opponents, the lesson for us 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 would want 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 have read was arguably not an investment book at all, Moneyball by Michael Lewis, in which he 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 looking 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 thus far played well, as consequence expectations must change as a result of this new information. Similarly, when information arises which conflicts with our views we are relaxed to change our view rather than stubbornly holding on to our previous, now invalid, opinions.

A further observation is how our maxim, “pick your battles”, was applied by England’s manager. While, obviously, it is 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 a good investment even if you have a strong belief in your view. 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.

The value of investments will fall as well as rise and investors may not get back the original amount invested.

Important Information:

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Source for information: Miton as at 04/07/2018 unless otherwise stated.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Miton and do not constitute investment advice.

Miton has used all reasonable efforts to ensure the accuracy of the information contained in the communication, however some information and statistical data has been obtained from external sources. Whilst Miton believes these sources to be reliable, Miton cannot guarantee the reliability, completeness or accuracy of the content or provide a warrantee.

Issued by Miton, a trading name of Miton Asset Management Limited the Investment Manager of the Fund which is authorised and regulated by the Financial Conduct Authority and is registered in England No. 1949322 with its registered office at 6th Floor, Paternoster House, 65 St Paul’s Churchyard, London, EC4M 8AB.