strategy Archives - Financial Planning in Wimbledon

Klopp it

Dominic Thomas
April 2024 • 4 min read

Klopp it

Klopp’s kids beat a Chelsea team that cost a billion to win the League Cup final, confirming belief that Jurgen Klopp is a marvellous manager, one that Liverpool should not let go. I think you would agree that this probably fairly reflects the sentiment across most media platforms following Liverpool’s 1-0 victory over Chelsea.

If you don’t like football, like Ted Lasso, this is not really about football. Stay with me.

Any manager has to select players from his/her squad from those available (not injured). Jurgen Klopp selected a team based on his own criteria, but suffice to say not all the regular stars were available due to injury. As a result, he had to look beyond the familiar, to the rising stars, untested for a big occasion. By the end of the match which predictably went into extra time, there were five Liverpool players under the age of 20 on the pitch bringing the average age of the 11 on the pitch to under 22.

There has been much praise for this bold approach and the legacy that the departing manager will have provided, a future that looks exceedingly bright. Credit where it is due, it was indeed an impressive result, though I think it fair to say that Chelsea are not at their best. However, the ages of players, cost and who won are not the issues here.

The tendency of the media is to move towards extremes, failing to retain a level head, seemingly stuck in an adolescent state of black or white. Much is being made of the success of Liverpool’s youngsters with euphoric sentiments about the future.

It is perfectly possible that Liverpool’s young players go on to have very successful (trophy winning) careers, but it also depends on undeniable luck. Skill as an athlete is the entry price, but luck will often feature. I mean luck in avoiding injury, having sufficient stability, opportunity to play. Typically players retire at around 35. James Milner is currently 38 and playing for Brighton, having moved from Liverpool at the end of the last season. He is one of the oldest and most successful premier league players. He was born in 1986 and his six minute Boxing Day debut for Leeds made him the second youngest premier league debutant, just nine days before his 17^th birthday. Milner has won lots and has the second highest number of Premier League appearances and is closing in on the record of 653.

Milner, like most athletes, does what he can to ensure he stays fit and skilled, but he has also been lucky with his fitness that has enabled him to continue playing and moving between teams that have a real prospect of winning (Manchester City and Liverpool since 2010).

Football pundits and commentators tend to forget luck, they forget survivor bias and often make statements with such a degree of certainty as a voice of authority, that many or perhaps most assume them correct. In the end they may be, but it’s unknown and bluntly, unlikely.

Investing is the same. We all see charts on billboards, newspapers or the internet showing how wonderful a particular investor is. There is no guarantee at all that this will continue or be repeated. Certainly they may have a good succession program in place, or assistants making the results more collaborative, but the truth is that we simply don’t know how much was luck and good health (investment managers also get ill, cancer, stroke, mental health issues and so on). Many or most investors elect for the belief that it is possible to consistently beat the market … denial of reality is a thing.

When James Milner made his debut at Leeds in 2002, Liverpool’s most successful period was already in decline, indeed they had never won the Premier League in his entire career until he helped them do so in 2020 some 30 years since their last League win (a record that their arch rivals Manchester United hope they do not match, but are now approaching halfway).

Sport is fickle, so is investing. As much as we would prefer not to acknowledge it, preferring to believe that we make our own luck – or where opportunity meets preparedness. Luck is part of the reality.

That’s why we avoid costly investment strategies that rely on the luck of a Manager. Over a reasonable time, one that is the real experience of investors like you, only about 5% of managers beat the market. So are you willing to bet your family’s wealth in 2024 on who they will be by 2044?… and pay a hefty premium for the privilege?

No, neither are we. At this point I cannot even tell you who will win this season’s Premier League which is over halfway through and concluding this Summer …

BACK TO ALL BLOGS

The Broccoli and Pizza Portfolio

I think its accurate to say that to date everything that has appeared in the blog has been written by me. It is probably well past the time someone else put something here. So, here is a piece by Jim Parker, the Vice President of Dimensional.

For some of us, it’s hard to give up on the idea that investment should be exciting. Picking stocks can be fun, after all, and there’s nothing like getting your timing right and bragging about it later with friends.

For all the accumulated wisdom about asset allocation and understanding risk, and about diversification and discipline, some people seem bound to see investment as an end in itself rather than as a means to an end.

For these folks, picking stocks is a hobby. They follow the gurus and soak up the financial media. Despite evidence to the contrary, they’re convinced they can build a consistently winning strategy from exploiting perceived mistakes in market prices.

Part of the reason for this is the natural human tendency toward over-confidence. For instance, we all like to think of ourselves as above-average drivers, when that’s simply not possible. Likewise in investment, many of us believe we have powers of foresight not evident in the wider population.

A Duke University study of corporate executives, published in 2010, found a dismal record of prediction from a group you might have thought would do well. Indeed, of 11,600 forecasts of the S&P 500 index over nine years, the survey found executives’ estimates of future returns and actual outcomes were negatively correlated. (This is a technical way of saying the executives were hopeless forecasters).¹

Research also suggests this tendency to trade a lot and make confident forecasts about stocks has a gender bias. Whether it’s a testosterone-driven instinct among men to big-note or something else, study after study shows the male of the species finds it harder to accept that they are unlikely to “beat” the market.²

For these red meat eaters, an investment approach that advocates working with the market, diversifying around risks related to an expected return, trading efficiently, exercising discipline and watching fees and taxes is going to sound like the financial equivalent of a broccoli and walnut salad – healthy but boring.

Surely the point of investment is to try hard and, Don Quixote-like, to charge at those market windmills? Are we not men?

There are a couple of ways of confronting this mindset. One is to hope for a change in human nature and convince each would-be master of the universe to separate his urge for ego gratification from his need to build wealth patiently and efficiently.

This is not impossible, of course. But one suspects it would take some time and would require an awful lot of face saving.

A second approach is to separate the investment nest-egg from the play money. If someone really wants to speculate on the market, they can be allowed to do that on the proviso that their long-term retirement money be invested the boring way.

This way the investor can buy some (expensive) entertainment and accumulate a few war stories to share at his next golf game without compromising the asset allocation painstakingly designed for him and his family.

It’s understandable that for some people investing is a kind of a hobby. After all, this is what keeps much of the financial services industry and media in business.

But in separating the concepts of speculation and investment, you can still enjoy the odd treat while ensuring a balanced diet overall.

Call it the broccoli and pizza portfolio.

Jim Parker: Vice President Dimensional

1. Ben-David, Graham and Harvey, ‘Managerial Miscalibration’, Duke University, July 2010

2. Barber and Odean, ‘Boys Will be Boys: Gender, Overconfidence and Common Stock Investment’, Berkeley, 2001