Why skill takes far longer to show in investment than at Wimbledon
As Wimbledon is again illustrating, the skill and dominance of the very best tennis players are quickly apparent but, in investment, they can take much longer to come to the fore
Arguably the most surprising statistic about this year’s Wimbledon is not the number of mid-match retirements in the opening week but that the bookies’ favourite for the men’s title is 35.
Granted the 35-year-old in question is Roger Federer, one of the greatest tennis players ever to draw breath, but winning this year would make him easily the oldest Wimbledon champion in the open era.
The last time Federer held the trophy aloft in SW19 was 2012 but – and, here on The Value Perspective, we always catch ourselves thinking like this around this time of year – in all 20 grand slam tennis tournaments from then till now, there have only been six male winners:
- Novak Djokovic (seven)
- Rafael Nadal (four)
- Andy Murray and Stan Wawrinka (three each)
- Federer (two)
- Marin Cilic (the US open in 2014).
A game of luck and skill, but mainly skill
Add in the 20 beaten finalists in this time and the only new faces are the one-off appearances by David Ferrer, Kei Nishikori and Milos Raonic.
Our point is, all games are a combination of luck and skill to some degree but tennis is one where a very high proportion of success comes down to skill.
Clearly luck plays a part – avoiding injuries, close decisions by officials and so forth – but skill is disproportionately important.
As such, it is unusual for the better tennis player to lose even over a short period of time – say, a set – whereas there are other games where luck is more important.
Football - a game of luck?
Football is an example where luck can play a bigger factor over short time periods, hence the ‘magic’ of the FA Cup, where minnows can sometimes triumph over giants in individual matches. The FA Cup is, however, seldom won by a team outside of the top division.
The same logic applies to the Premier League, where any team can beat any other on a given day but, over a 38-match season, the skill is revealed.
Certainly, when an outsider triumphs overall, as 5,000-to-1 shot Leicester City did in 2015/16, it is a once-in-a-lifetime event – quite literally because, as we suggested in City haul, the bookies are unlikely ever to make the mistake of offering those kinds of odds again.
How to decide how much luck plays a part in a game
A good way to work out the degree to which luck plays a part in a game is to consider how straightforward it would be to lose on purpose. In tennis, you could manage that quite easily but investment is a different matter entirely.
There is a huge element of luck in investment and it would actually be quite hard to construct a portfolio you could guarantee would underperform over the next three years.
This is why an investor’s true ability cannot be appraised over the short term. This is a ‘game’ where skill does come to the fore but only over long periods of time – Warren Buffett has been doing what he does for decades.
Frustratingly, however, investment is also something where people typically use a three-year or even a one-year time horizon as the key determinant of whether or not you are any good at it.
Good investors use more skill than luck over the long term
The high element of luck involved means these are unlikely to be the best periods over which to make such an assessment.
The reason value investment is such a powerful strategy is that it has more than 100 years’ worth of history showing it can outperform. The long-term nature of this track record is the factor that makes it so compelling. Of course you should always bear in mind that past performance is not a guide to future performance.
Obviously, value can underperform over a year or indeed three, but that does not wholly reflect the strength of what is involved and it is over the longer term that it has really demonstrated its power.
Investment strategies come and go – there is always something that is flavour of the month on a one and three-year basis – but, like Roger Federer, the best will eventually rise to the top.
Looking back over the last 50 years – in investment as in tennis – the true greats stand out.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
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.
They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.
This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.
Past performance is not a guide to future performance and may not be repeated. 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.