What does Marcelo Bielsa's Leeds United have to do with Warren Buffet and value investing?

For football fans, one standout aspect of this Premier League season so far has been Leeds United.

It’s their first season back in the top flight of English football since 2004, and they have been hailed a “breath of fresh air” by pundits for their manager’s unique tactical approach.

As a Leeds fan with an interest in investing, Marcelo Bielsa’s dedication to one full-throttle style of play reminded me of the commitment of the world’s most famous investor, Warren Buffet, to the value investing strategy.

It’s not unusual for a team to change tactics in their efforts to remain in the top tier of English football. They often become ultra-defensive following promotion to the Premier League.

However, Bielsa has been absolutely resolute over the team retaining the high-intensity and ambitious style of football which served the side so well in the Championship (the second tier of English football).

Whilst this consistent approach has brought them some superb performances this year, it has also left exposed at times.

Bielsa has been put under pressure to change the approach, but he said last month he would rather finish in the bottom half of the league than compromise his style to be in the top 10.

Financial news headlines would argue it’s a similar story for value investing. For the dedicated value investor, every year for the last decade or so may have felt like that first year in the Premier League; tough, filled with patches of disappointing results and leaving managers tempted to change their style.

What is value investing?

Value investing is an investment style where people choose to buy companies that they think are trading at a cheaper price than their underlying characteristics deserve. These investors aim to make money through buying and holding these stocks in the belief that over the long term their prices will eventually increase (or “mean revert”, if you want the technical term) to represent their true (higher) intrinsic fair value, at which point they sell them.

Psychologically, value investing is tough. The prices of stocks you buy can continue to fall and it can be both difficult and mentally painful to watch. The style requires a consistent mindset, process and belief that long-term benefits vastly outweigh short-term discomfort.

Growth investing on the other hand is the opposite. Here the focus is on investing in companies whose earnings or profits are expected to grow at an above-average rate compared to others. These are often more expensive than other stocks because of their future promise of good growth.

What’s the link between value investing and Bielsa’s philosophy at Leeds?

Any true value investor will tell you the investment ride has not been easy over the last decade. Overall, investing in a growth style will have scored you much greater returns than if you had invested the same amount in a value style.

However, there have been a handful of intense periods where value investing has come out on top, and these are known as “value rotations”. The chart below shows these “value rotations”: where value and growth have taken turns in leading each other with annual total returns, shown as a percentage.

It’s been in these periods that the value investors who, similar to Leeds United, remained consistent in their philosophy despite their losses, have won pretty emphatically.

Of course, when it comes to investing it’s important to be diversified: not just in the countries and sectors in which you invest, but also in the style.

When on the hunt to find a value fund manager, my suggestion is to look for one who shares the same three key principles as Marcelo Bielsa and Leeds:

  1.  They remain committed to their value investment approach, just like Leeds play the same way each week. This means when value performs, they perform strongly and when it is out of favour they don’t. This gives you the style diversification you need in your portfolio.
  2. They are not phased by short-term value performance and think only long term. Good fund managers think in years not quarters, and good football managers think in seasons not games.
  3. They will constantly analyse, test and push the companies they are looking to invest in/are invested in, in the same way Bielsa mercilessly pushes his Leeds team to improve.

Who knows what the future holds for Leeds United this season and where they will finish in the table. The only thing I believe we can be certain of is that they will continue to play the same way to get there, wherever it may be. You should be able to say the same of your fund manager.

Read on: The data that shows a case for long-term investing

This information is not an offer, solicitation or recommendation to adopt any investment strategy.  

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

 

View the original article on MoneyLens. MoneyLens is a website aimed at helping millennials manage their money.