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Beware picking an investment – or a football team – for its glory days

Did the legions of Liverpool fans who started following the club on account of its phenomenal success in the 1970s and 1980s make the mistake of ‘base rate neglect’. The bulk of this piece first appeared in August 2019

16/06/2020

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

When the 2019/20 Premier League season resumes this evening, after the best part of three months in lockdown, Jurgen Klopp’s Liverpool team will need a maximum of six points to claim their first top-flight title since 1989/90. That three-decade ‘drought’ has not exactly dented the club’s fanbase, of course – as was evident this time last year from the reaction to the culmination of a triumphant Champions League campaign.

We are not just talking about the 750,000 supporters who turned out to cheer the players during an open-top bus parade through Liverpool the day after the team beat Spurs 2-0 in the final in Madrid’s Metropolitano Stadium – or even the member of The Value Perspective team whose beard you could be forgiven for mistaking as a tribute to Klopp, if it did not predate the arrival of the Liverpool manager by some years.

No, the phenomenal success the club enjoyed in the 1970s and 1980 has ensured a surprising number of fans up and down the country – and largely of a certain vintage. As they now look expectantly towards the near-certainty of going one better than last season’s runner-up position, however, to what degree, we wonder, were their younger selves guilty of the behavioural sin of ‘base rate neglect’?

Bias to the new

As we have discussed before – also in a football context on the subject of Swindon Town FC and statistical analysis – this has nothing to do with interest rates but involves attributing more weight to newer or more immediate information (Liverpool seemingly winning trophies at will over two decades) and less to more general probabilities (great teams do not stay great for ever; other clubs grow richer and more successful).

On that latter point, just think about all the thousands and thousands of fans who ‘invested’ in Liverpool on the strength of the club’s dominance and their experience since. In Premiership terms, as the following chart shows, the club’s record has not been disastrous – in the last 30 years, it has never finished lower than eighth – but, equally, those fans would surely have been hoping for more than being runners-up four times.

Liverpool FC Premier League position

 

 

Source: Schroders

To be fair, since last winning the Premiership, the club has of course been successful in other competitions – most notably in the Champions League, where last year’s success was matched by ‘the Miracle of Istanbul’ in 2005. We can put that all in perspective with the following chart, which awards points by competition win: Premiership (5), Champions League (4), other European trophies (3), FA Cup (2) and League Cup (1).

Liverpool FC success 

Source: Schroders

We would immediately concede the chart is hugely arbitrary – particularly the minus five points for ‘Wearing white suits to an FA Cup final’, which is why there is a negative score for 1996. Sartorial swipes aside, however, it does serve to illustrate the successes that have come for Liverpool – and there are certainly more than for my own team, Crystal Palace – have been fewer and further between than the glory decades.

And just as picking a team to support because it is enjoying a period of success in your youth does not mean you will be basking in the same levels of reflected glory in later years, so it goes in investing. When you are about to ignore an expensive valuation to buy into a company that appears to be doing brilliantly and looks set to take over the world for years to come, remember those Liverpool fans who cannot have imagined they would have to wait so long for another league title. And certainly – as poker star Annie Duke also noted in a recent conversation – don’t forget the importance of base rates as an aid to more objective decision-making.

Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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