Regression to the mean: lesson from football
Category: Thought for the day
What has a good comedian and famous investors in common? Answer: good timing. But there is a difference. For a comedian good timing is about split second precision, while for many investors it’s as much about luck. Let me explain by talking about the current and previous managers of Manchester United.
I saw these stats in a posting on Google Plus over the weekend. They were comparing the record of the much beleaguered Manchester United manager David Moyes during his first 31 games in charge of the UK’s biggest football team with that of Sir Alex (possibly a god) Ferguson during his first 31 games. It goes like this: David Moyes has 18 wins, six draws and seven losses, Alex Ferguson: 12 wins, ten draws and nine losses. So what has that to do with investing? Well quite a lot actually.
Let’s look at Sir Alex’s record. He took over the world’s most popular football club at the beginning of an era when money mattered in football more than ever before. During his 25 years in charge, the world’s most popular club almost won as many major trophies as the world’s second most popular club – Real Madrid. What we have seen over the last quarter of a century is that the game of football has been dominated by a very small number of clubs. The day when teams such as Nottingham Forest can come from nowhere to be European Champions seems to be largely over. If he were alive today, Brian Clough would only be able to win honours in the Champions League, or indeed in the Premiership, if he had managed a team with either a huge fan base, or a very rich owner. And so we have seen a hand full of clubs dominate the top flight: Real Madrid, Barcelona, The two Milan teams, Bayern Munich and the top premiership sides we have all heard of.
Now I am not saying Sir Alex didn’t make a difference, and I am not saying he wasn’t a good manager. But I think two key things were behind his success. A: he managed the world’s most popular club at a time when money mattered more than ever before, and B: he stayed in the job for 25 years.
If David Moyes remained Manchester United’s manager for the next 25 years, I predict his track record would turn out to be just as impressive as Sir Alex’s.
Now let’s move away from football to the world of finance and politics.
In many ways it seems the relationship between longevity and success is the other way round. If you are in a top job for an extended time, your sins and errors will catch up with you eventually. Gordon Brown ruined his legacy as the UK’s best ever chancellor by staying in the job for too long, and then really ruined things by becoming Prime Minister. If he had resigned from UK politics after say seven years as chancellor, and joined Oxfam or some other organisation concerned with developing nations (his hobby horse), I think that right now he would be known as Lord Brown, and hailed in reverential tones.
But timing is everything.
Warren Buffett applied a very specific approach to investing, and during the period of his working lifetime that approach has paid off spectacularly. But let’s add a caveat. His favourite stock, famously is Coca Cola, and just as famously he tends to shun technology. Buffett’s investment life happened to coincide with a period when the US economy was largely building on the innovations of the past. The second half of the 20th century saw rapid growth, but it mainly built on innovations of the late Victoria era, and the early 20th century: the motor car, flight, electricity, mass production, steel etcetera. It was also an era that saw the great brands consolidate their position.
Given the rising levels of diabetes and the creeping realisation about how bad sugared drinks are for you, I question the future of Coca Cola. Given the way technology is set to disrupt traditional industries, including energy, banking, retail and auto manufacturing, I am not sure that shunning technology is a good idea. As I say, timing matters; different strategies pay off at different times.
And that brings me to fund managers. Anthony Bolton illustrates my point, I think. His approach entailed buying into smaller stocks in the 1980s and 1990s, and buying technology after the dotcom crash. The timing of that approach was just right. His timing into China was awful.
Looking forward, I think the Anthony Bolton approach makes sense. We are seeing a new entrepreneurism in the UK, which will result in a slew of companies few people have ever heard of being among the country’s biggest in a few years’ time.
But as I say, timing is everything. Certain mind sets, mind sets we are probably born with and can do very little to alter, work really effectively at certain times; at other times they don’t.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees