The end of a frenetic month of sport that has taken in, among other things, the Wimbledon Championships, the Tour de France, the Henley Royal Regatta, the Open and a spread of Grands Prix and limited-over cricket internationals as well as World Cups in hockey, rowing, rugby sevens and something else that temporarily escapes us, seems an appropriate time to consider the zero-sum game nature of investment.
The zero-sum game
To make money as an investor, I must buy shares from someone that then appreciate – thereby denying them those profits.
By the same token, I must also sell my future losers to someone else, so they suffer the losses instead.
Let’s now think about that in the context of an individual sport and, since football – ah, yes, that was it – has been rather overrepresented in the media of late, we will go with tennis.
Tennis, again, is a zero-sum game – after all, every point you win is also a point lost by your opponent – and, also like investment, it offers a wealth of data to analyse.
Too much data, in fact, for the purposes of this article so please forgive us for making some crude assumptions in what follows, where we will pretend each point played is independent and so ignore the intricacies of second serves, games, sets, tiebreaks and so on.
Winning at tennis
That all being so, how many points does a tennis player need to win to count as a good ‘investment’?
To answer that, we will look at the women’s and men’s singles finals played out at Wimbledon earlier this month. In the former, Angelique Kerber won 56 out of 101 points played (55.5%) to beat Serena Williams while, in the latter, Novak Djokovic won 100 out of 174 points played (57.5%) to beat Kevin Anderson.
Both, then, were relatively comfortable wins – in contrast to the two longer, closer semi-finals in the men’s tournament, where Djokovic won 195 out of 386 points played (50.5%) against Rafael Nadal while Anderson won 298 out of 569 points played (52.4%) against John Isner.
The ladies’ semis were much less tense, with Kerber winning 58% of points played against Jelena Ostapenko and Williams 60% against Julia Görges.
And yes, if you bear with us a little longer, we will translate that into an investment context.
Let’s assume every ‘win’ point counts as outperforming the market by one percentage point in a day and every ‘loss’ point counts as underperforming the market by one percentage point in a day.
Let’s also assume the market is open 250 days a year and, for the purposes of this analysis, that each market movement is independent.
All that being so, what percentage of ‘win’ days do you need in order to outperform the market by 10% in a year?
The answer is 52.15% – equivalent to 130 days – which means, for each of 120 days of the year, it feels like you have lost.
To put it another way, and as the following graph illustrates, compared with our six tennis matches, a 10% gain works out as only being easier on the nerves than the Djokovic-Nadal semi-final battle.
Tennis 'win' vs 'lose' points in investment context
Source: Schroders, July 2018
What it is closest to, in fact, is the Anderson-Isner marathon that finished 26-24 in the fifth set and, at six hours and 35 minutes, was the second longest match in Wimbledon history.
And the reason we are labouring this point is that you won, remember?
You finished the year 10% ahead of the market – that’s a great year for any investor – and yet for almost half the time you would have felt more like Isner than Anderson.
To win the war you might have to suffer some battle losses
The behavioural ramifications of this for investors is significant as, for large periods of time, your instincts will be telling you to sell, sell, sell.
Successful investment is not about instinct, however – it is about sticking to a tried-and-tested process that edges the odds in your favour and helps you to make disciplined decisions about when to buy and when to sell.
As we have written in Four edges, value is just such a process.