Weekly Digest

Investments and the fallacy of leaving it all on the pitch

James Klempster, CFA

13 May 2019

Last week’s Champions League football results are unlikely to have passed by even the most football phobic of our readers.  Victories against the odds for Liverpool and Tottenham were hailed as perfect illustrations for sporting adages such as never give up, it isn’t over till it’s over and their ilk.  Investment professionals regularly dip into sport for analogies or as a source of inspiration: I would guess that about half of the keynote speakers at conferences are there by dint of their sporting prowess.  The implication is a compelling one: the investment manager surrounds themselves with successful people and appropriates, whether by osmosis or by some very prescient questioning, powerful and useful wisdom / tenacity / focus etc that enhances their abilities as an investor.

But the never give up schtick is, I think, only of limited use for investors and can be a very dangerous game indeed.  While it might make sense for a sporting star to leave everything on the pitch and crawl off exhausted knowing they have given their all for a glorious victory / gallant defeat, it is not necessarily the same for investment managers.  The problem for investors is that some of their positions are duds: it is an inevitability when managing portfolios that some of the holdings in them will not perform as expected.  The decision investors face daily, therefore, for at least part of their portfolio, is whether to call it a day and move on to the next opportunity.  Clearly this is a difficult decision to make not least because it flies in the face of the never give up orthodoxy.

Maybe at a micro level the sporting analogies can be useful.  Pragmatism is a necessary feature of even the most red-blooded sporting encounters.  If it wasn’t then teams would not have a formation.  Without pragmatism players would chase every ball and turn their legs to jelly.  Players sometimes have to live with the fact they have been tackled and get back in position rather than needlessly chase down their tackler.  Marathon runners must pace themselves, rugby players must turn the other cheek and fund managers must sell.

The key questions for fund managers faced with a holding that is not working for them is when to give up?  John Maynard Keynes provides us with a starting point “When the facts change, I change my mind”.  That’s fairly simple to apply; if the investment thesis is totally undermined by something outside of your control you may want to think again.  It gets difficult when only some of the facts change leading to nuanced decisions weighing up the balance of probabilities on a whole suite of variables.  Ultimately this boils down to judgment.  The benefit of a robust and repeatable process is that it makes this decision making as painless as possible.  Judgment gets clouded by emotion, especially when it comes to cutting losses, but it is an essential discipline for fund managers.  Having a focus on client investment outcomes adds perspective: when we build portfolios, we ask whether this combination of assets gives us the best chance of achieving an outcome.  Having an experienced team that have worked together for a long time as we do at Momentum also helps.  It is important to ask one another the difficult questions and have positions justified by economics not ego.

So, let’s celebrate the prosaically pragmatic.  Let’s eulogise when a player lets the ball run out for a throw; a tennis player doesn’t dive for a passing shot; a golfer plays it safe, because these are all lessons for investors.  They may not make the highlights, but they are the difference between long term success and failure.  As for the football, as a Spurs fan I hope Liverpool play like a bunch of fund managers and Tottenham leave it all on the pitch on 1 June.

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