What can investors learn from Leicester City’s chase for the Premier League title?
Leicester City has surprised everyone by challenging for the English Premier League title, but what does the club's fortunes reveal about behavioural psychology and how does that relate to investing?
25 April 2016
If you thought the most important investment-related news story of 2016 so far was Brexit, Donald Trump, China, the oil price, or politicians’ tax return revelations, you’d be wrong on all counts.
It’s Leicester City FC and its quest to win its first Premier League title.
I don’t make this statement to trivialise or belittle either the fortunes of our clients in uncertain markets or the potential success of a proud football club.
Our clients’ success is ours, given our goals are completely aligned with theirs: the creation of long-term value to assist them in meeting their future financial needs. And the conviction, patience and support shown by UK football fans could be a timely reminder of core values for struggling investors in tough times.
The reason I believe Leicester City’s story relates so closely to markets and investment is due to the behavioural psychology that those fortunes reveal.
It was Matthew Syed at The Times (The Game, Monday 14 March 2016) who first highlighted this parallel; Leicester City, in trying not to lose the race for the Premier League rather than playing to win it, will face the challenge of loss aversion and the paralysis it can cause.
It’s the equivalent of the fund manager’s temptation to lock in gains too soon and become overly protective, or a retail investor’s counter-productive desire to avoid losses at all costs without understanding risk as manifested by volatility.
And, in the case of Leicester City, this loss aversion has affected those fans cashing out on their start of season bets at 5000-1. Locking in a gain becomes very tempting when so much is at stake and I don’t blame them for that.
Committing to the cause
What investors need is assistance to differentiate when they are selling out of conviction, as opposed to the fear of losing a gain, and an advisory reminder of the importance of a long-term financial plan.
Loss aversion, first demonstrated by Amos Tversky and Daniel Kahneman, is the most pervasive of all behavioural biases, mainly because people have always had a tendency to prefer avoiding losses to acquiring gains.
For those investors who insist on trying to time the markets and sell at the first sign of increased volatility, here is the Schroders 3 Step Journey to rational decision making:
We all make choices that don’t make sense – it’s human nature. Mix in the fact that investors are often over-confident in their own financial acumen (our recent research found that 65% of investors are confident in their ability to make sound investment decisions) and you have a potent, destructive force that can de-rail your financial plans.
Long-term, tactical success
The fund managers on our value team frequently talk about their unemotional appraisal of risk and reward, and their conviction in the value style of investing (actively seeking stocks of companies that they believe the market has undervalued).
With five games to go, if Leicester City sticks to its long-term, tactical success with low squad turnover and an absence of fear, its chances of beating loss aversion and winning the league will surely increase.
To find out more about your own behavioural biases, take the Schroders incomeIQ test. The test uses a simple set of multiple choice questions, which should take no more than five minutes to complete at www.schroders.co.uk/incomeIQ.
Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.