The winning goal of turning theory into practice – with Simon Hallett

One recurring lesson from our ongoing series of podcasts, here on The Value Perspective, is that identifying the behavioural biases that can influence people’s decision-making is one thing – addressing them in practice quite another. And, given guest Simon Hallett has now been channelling his three decades of investment experience into running a football club, we were not going to miss the chance to seek his views on the subject.

Hallett joined US-based investment advisory business Harding Loevner in 1991, becoming CIO in 2003, and is now vice-chairman. Less conventionally, perhaps, he is also vice-chairman and majority shareholder of the club he has supported since he was a boy, Plymouth Argyle, whose 3-1 win over Port Vale on Sunday confirmed their promotion to the second tier of English football as champions of League One.

[Please insert link to Simon Hallett podcast]

How then has Hallett set about creating a good decision-making environment at the club? “Whenever I talk about behavioural finance and cognitive biases in public, I am very clear that there is nothing we know at Harding Loevner that is not freely available from listening to podcasts or reading books,” he replies. “You can buy the complete works of Michael Mauboussin for $50 – and, frankly, you do not need much else.

Competitive edge

“So any competitive edge comes not from what you know about decision-making but whether you can put it into practice. It took me 20 years as CIO to gradually improve the firm’s decision-making processes – they can still be improved further – but I did not start that project with a clear idea of how the investment process would end up. We learned as we went along – what worked, what people would accept, what people resisted.

“In the case of this football club, though, we have taken what we learned from the investment firm and we have already created broad structures that look a lot like an investment process. So we have defined our football philosophy – we play quickly through the thirds, we play on the ground, we play attacking football where we accept we are going to concede goals because of the space we are creating at the back.

“We then create data that describes the attributes of each playing position; we screen candidates for further research; and we then build a ‘portfolio’ of the candidates we have identified. As such, it is very similar to almost any bottom-up investment process that starts with an investment universe and ends up, by way of company research, with a portfolio of stocks.”

Underlying value

One big difference to investing, however, Hallett points out, is football has no model for valuing assets – the players – only prices. “At least in investing, we have a broad model,” he adds. “It may be subject to flaws but most bottom-up investors at least believe a company is worth the net present value of its cashflows; and we have at least a broad understanding of the kind of rate we should be using to discount those cashflows.

“That is not the case in football, where there is no concept of actual underlying value – the ‘cashflows’ a player could generate, so to speak. There are just beginning to be the first inklings of some way of thinking about this but it is in a very naive state, which is indicative of a more general issue – that football tends to be run by, in quotation marks, ‘proper football people’.

“So there seems to be very little by way of an economic way of thinking – and I do not mean thinking about macro or even microeconomics; I mean thinking in terms of models. When I first joined the Argyle board, for example, I asked what model we used to forecast attendances for budget purposes. And I was literally told – this is football, Simon, we do not do models.

Pattern recognition

“But when I asked if the weather or recent results or the identity of the next opponent mattered, I was told that they all did. So they did have a model – they just did not write it down. When you are trying to develop processes, however, writing down the sources of your gut instincts or your pattern recognition can actually be very valuable – and it is now something we are trying to do at Argyle.”

As we observed in Maximising outcomes, a strong parallel Hallett identifies between investment and football is the reverence so many participants hold for individual flair and genius. “In both activities, we tend to overestimate the impact of football managers in the same way we tend to overestimate the impact of portfolio managers – and underestimate the importance of structure, process and discipline,” he elaborates.

“One reason for this is people simply do not like their freedom curtailed – just think about, for example, those who saw having to wear masks during Covid as an infringement of their liberty. So having the structure and process and discipline to overcome biases involves a continuous process of education and exhortation. It is very, very hard – but that is why the competitive edge comes from being able to put the theory into practice.”