Sport is a subject close to our hearts here at The Motley Fool Australia. Perhaps unsurprisingly then, a book – subsequently turned into a Brad Pitt movie – that combines both sport and analysis is a favourite.
Michael Lewis’ baseball book Moneyball follows Oakland general manager Billy Beane on his quest to build a winning team through the power of numbers. As the winter football codes get into full swing, I wanted to take a look at some of the valuable lessons the game has for investors.
Every investor is, in a way, coach and selector of their own portfolio. Although investing isn’t a winner-take-all contest, there are many similarities between building a premiership-winning football and putting together a great portfolio. Some are statistical and some are psychological, but understanding these simple lessons can help in your quest for investing greatness.
Lesson No. 1: Know your limitations.
Your weaknesses are at least as important as your strengths when it comes to investing. We can’t all be Warren Buffett. We all have the built-in limits to our available resources, whether it’s investable cash, time, or knowledge. Similarly, the smart coach knows what they have to work with, from salary caps to the personality of the players.
As a Sydney Swans fan, I’m particularly aware of the claim our team was ‘winning ugly’ in years gone by. You won’t be surprised to know that doesn’t worry me a lot – but the point is that Paul Roos and the team played to their strengths – and through focus, effort and dedication were able to take home a flag.
Some teams attract big name players and play an expansive style of footy. Others focus on teamwork and grit. Whatever your circle of competence, it’s worth sticking to until you feel comfortable branching out.
Lesson No. 2: Don’t get too attached.
Sydney Roosters’ captain Braith Anasta has signed with the Wests Tigers, after his current club decided its money was better spent elsewhere. Clubs have limited funds under the NRL salary cap and need to invest in players who they think will take them to the next premiership
If you’d invested in Buffett’s Berkshire Hathaway (NYSE: BRK-A, BRK-B) a year ago, you’d be trailing the market’s gains. Yet many investors continue to buy Berkshire on the belief that Warren Buffett’s wisdom will be a long-term perpetual-profit machine. Buying Apple (Nasdaq: AAPL) instead of Berkshire a year ago would have nearly doubled your money — but even Apple shareholders need to be able to sift through constant hype to figure out if it’s time to look for the next big winner. Time will tell which company ends up ahead.
Your goal is to build the best portfolio to win championships for its No. 1 fan — yourself. Don’t hang on to stocks past their prime, or lavish more money on overpriced favorites, out of a sense of loyalty. Play to win!
Lesson No. 3: Analyze past performance (but don’t rely on it).
A player who played for the Wallabies a year ago might fall out of form this year, but he’s a lot more likely to have a good season than the journeyman picked up for a pittance. That’s why the provincial teams pay up for high-performers. That’s no guarantee that he’ll remain dominant throughout a new contract.
Since there’s no finals series on the stock market, building your portfolio around companies with proven performance is one of the best ways to get to the finals (that is, beat the market) year in and year out. Companies such as News Corporation (ASX: NWS) and Monadelphous Group Limited (ASX: MND) have 10-year EPS growth in excess of 30% per annum for the last 10 years.
If your limitations won’t allow investing in “sin stocks,” there are many other companies whose repeatable business models offer the opportunity to reap long-term gains.
Lesson 4: Don’t panic (and think long-term).
This should be obvious. Every game is a risk for the players on the field, just as every day can bring new challenges for the companies in your portfolio. The road to the finals always winds up taking a few unexpected turns, just as your portfolio will have many changes made over the years. Building a premiership team takes time and planning. It’s the result of years of hard work on both the part of management and the players.
Things will go wrong. There’s no such thing as the perfect team, or the perfect portfolio. But a good coach always has backup plans. If you’ve kept aware of your limitations, maintained a dispassionate distance, and understand each company’s situation inside and out, then you should be able to handle sudden price changes calmly and rationally. Don’t hesitate to sell if your investing thesis turns out to be wrong, but don’t give away the farm just because you fell behind in the standings. A season lasts around 6 months, but we measure success in years. Either way, there will be more opportunities, as long as you play it smart.
Are you ready to build a premiership-calibre portfolio? If you are looking for ASX investing ideas, look no further than “The Motley Fool’s Top Stock for 2012.” In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.
This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article was originally published on fool.com