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?
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.