Fund Manager, Equity Value
Manchester City may still be fighting for silverware on four fronts but – as investors should also be – their manager is well aware there is a giant leap between what is possible and what is probable
Two weeks into April and Manchester City are still in a position to pull off what would be an unprecedented footballing ‘quadruple’ by winning the Premier League, Champions League, FA Cup and League Cup all in the same season. Include trophies such as the FA Community Shield and City – and indeed their local rivals United – have won quadruples of a kind before but this would be the big one. Can they do it?
If we apply the ‘Three Ps’ tests, Professor Aswath Damodaran recently outlined in The Value Perspective podcast and also in Give Ps a chance, the prospect is still technically possible and arguably plausible – City have reached the final of the League Cup, the semi-finals of the FA Cup and they travel to Germany for the second leg of their Champions League quarter-final with a slender 2-1 advantage over Borussia Dortmund.
Finally, City are just handful of wins away from securing the Premier League title – and that is assuming their closest rivals do not drop points over the coming weeks. By itself, then, that particular leg of the quadruple would also (probably) pass Damodaran’s third test – is it probable? But what about Manchester City completing the set? As it happens, we recently heard two competing views from within the club itself.
‘Everything is possible’
Asked by reporters last month whether the team could pull off this achievement, City wing-back Oleksandr Zinchenko suggested April and May represented “the most important two months in our careers”, adding: “Like Bayern Munich showed last year – they won everything and the other year [2008/09] Barcelona did it as well with Pep and I think everything is possible.”
Zinchenko concluded with the observation: “We have an unbelievable squad, the best players in the world, definitely, why not?” And while he may of course have simply thought it polite to give the media what they were after, there is also the prospect he was illustrating a behavioural bias common among human beings – against the broader, more fact-oriented ‘outside view’ and towards the so-called ‘inside view’.
As we have discussed in the context of other sports, such as racing, sailing and tennis, here on The Value Perspective, this involves making predictions based on a narrow set of inputs, which may include anecdotal evidence and misperceptions. A classic financial example is the way company managements are always so convinced a planned acquisition will add value even though history suggests some two-thirds disappoint.
Interestingly, representing the ‘outside view’, we then heard none other than the aforementioned Pep – the Manchester City manager Pep Guardiola, whose level-headedness we recently flagged in Paying the penalty. Following his upbeat player to the microphone, he replied bluntly to the same question on his team’s quadruple chances: “I am older than Mr Zinchenko, I have more experience and I don’t agree with him.
“The only thing he has to be worried about is trying to do a good game and try to go through. This is the only way. Four titles is a utopia. It never happened before and I think it’s never going to happen. We just think about this [match], then the next one ... Hopefully the players can come back safe and well because we play for important things when they come back, and this is the only important thing.”
Clearly it is part of Guardiola’s job to play down speculation and yet he was not just dismissing his team’s chances of a clean sweep for effect – he is well aware this will be City’s third serious pop at a quadruple under his stewardship and their fourth in the last seven years. City have also never won a Champion’s League semi and, should they see off Borussia, the might of Bayern Munich or Paris Saint-Germain lie in wait next.
Nor should investors believe they are immune from the inside view – after all, every professional is convinced they will outperform their benchmark index even though the cold statistics show that, over three years, the average unit trust fund manager does not. In which case, you might reasonably ask, what makes us believe, here on The Value Perspective, that we will outperform in the long run if the numbers suggest otherwise?
To offer one answer, every January we look to see what lessons we can learn from the previous year’s investments. We analyse what we did right in our portfolios – and what we did wrong – and, while the great majority of people would say that all comes down to what made and lost us money, the great majority of people would be completely wrong.
For us, the right lesson to take from the process is, if I took a particular decision 100 times, would I make money on average? As value investors, we want to make investments that make us money 60 or 70 times out of 100. As such, if an otherwise sound course of action turns out to have been one of the times we lose money, the lesson is not ‘never do that again’ but ‘just keep doing it – over and over and over’.
That, in essence, is what value investing is – a set of rules that helps to keep you on the right side of the averages so that, instead of being caught out by your own emotions – how ‘probable’, at the time, you believe any event is to happen or decision is to play out – you put yourself in the best possible position to exploit the emotions of others
Fund Manager, Equity Value
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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