To The Moon

With the World Cup under way in Qatar, there is plenty at stake for the 32 countries contesting for the top prize in international football. It is not just glory and fame at stake for the managers, coaches and players.

Believe it or not, the teams would also be fighting for their nations’ stock markets and economy.

The euphoria from winning or losing the World Cup seemingly extends to the stock market performance of the countries involved.

The stakes are high. On average, research has found, after a country’s loss in the World Cup, its stock market performance will produce significantly below-average returns the next day. However, the research did not find a correspondingly positive effect for the stock markets of countries whose teams won.

There is a common saying in football that nobody remembers the losing team in a final.

And, based on a study, there is more at stake than just bad memories for the losers. Coming in second globally is not a shabby effort by any means, but countries would really want to avoid losing in the final.

This is because the runners-up in the World Cup tournament have traditionally had a terrible time in the stock market after the loss.

In the first month after the World Cup final, seven of the last nine runners-up’s stock markets performed at 1.4 per cent below the global market average.

And the slump continues into the next two months, with an average relative fall of 5.6 per cent over the three months.

The good news is that things do pick up after that, and by a year’s time, the loser’s stock market would be underperforming by just 0.4 per cent.

No time for the markets during matches

The attraction of the World Cup is so compelling that it has a noticeable effect on financial market activity, as traders – like everyone else – turn their attention to it.

Research has found that when a particular team plays in a match, its national stock exchange will be pretty dull during that period of time.

In one example, the number of trades on Chile’s stock exchange fell by 83 per cent when the team was playing.

In fact, Latin American teams’ stock exchanges are among the top markets affected when their national teams play.

The dip in activity starts before the match kicks off and continues even up to 45 minutes after the final whistle is blown. At half-time, dips are still around 35 per cent.

The report also noticed further dips of about 5 per cent in trading activity when a goal is scored.

The limited attention investors pay to the stock markets during match days affects the price discover process due to thinner market liquidity. This means that relevant news that might typically affect the markets would not be reflected in market prices as quickly as it normally would, or may cause wider price gyrations due to the lack of liquidity.

If you think picking which team is going to win the World Cup is challenging, stock markets are even more unpredictable.

Just like in a football match, extreme emotions of greed and fear reign in financial markets.

But principles in football can guide investment strategies.

1. Strategise first: All successful football teams go into a match with a strategy and a formation to win. The strategy would seek to exploit the weakness of its opponents and take advantage of its own strengths.

In investing, it’s the same concept. There must be a good understanding of what you are investing in. More than that, there is a need to have a strategy in place.

The principle behind a good strategy is diversification. In current times, the need for diversification is more important than ever.

As the world enters a later stage of the economic cycle, idiosyncratic events can trigger unexpected losses. The investment strategy is to build a portfolio that optimises the benefits of diversification.

Just like the interplay of free-flowing football between defence and attack, there is a need to combine traditional and non-traditional assets, risky stocks and defensive bonds, and allocating across regions is crucial in making portfolios profitable in good times and to preserving gains during downturns.

2. Be flexible: The football team that would win is the team that’s able to adapt to unexpected changes such as a red card or an injury.

This is the same with investing. This year, the tide has turned in markets with higher rates.

The change in tide will create greater market unpredictability. Investors must be flexible to adapt to these changes. Investment strategies that worked in yesteryears may not work as well in the years ahead.

There is a need to be nimbler and to adjust one’s strategy as financial conditions change. For example, there is a need to make some tweaks to the 60/40 equity-bond portfolio. There is a need to diversify into alternatives that include commodities that can potentially reduce volatility and enhance returns in a portfolio.

3. Control your emotions: Many World Cup wins are owed to penalty kicks.

Taking the decisive penalty kick is a test of nerves. Even famous footballers such as David Beckham and Roberto Baggio have cracked under the pressure of a crucial penalty kick. Controlling one’s emotions can be the decisive factor between victory and defeat.

When faced with uncertainty, what does a goalkeeper facing a penalty kick and an investor have in common?

When the goalkeeper is anticipating a goal, he has to decide in advance which direction the ball will be kicked. Should he dive left, right or stay in the centre?

Statistically, research has shown that a goalkeeper’s chances of saving a shot are 14 per cent if he jumped left; 13 per cent if he jumped right, or 33 per cent if he stayed centred.

Yet, 94 per cent of the time, the goalkeeper jumped either to the left or right, despite having a higher chance of stopping the shot if he stood in the middle.

There is a behavioural need to do something – the more dramatic the action, the better.

Investors are similar. If an investor has a well-diversified portfolio, the best course of action is to stay invested and do nothing. However, when overwhelmed with uncertainty, there is a tendency for investors to overtrade – sell at the low, or buy at the high.

Sound wisdom for football works for investors too. Amid uncertainty, stay centred and invested in a well-diversified portfolio.

The ability to discern between deteriorating fundamentals and noise is key to investing. The former provides a reason to reallocate a portfolio, while the latter is an opportunity to take profit on a hedge or to double-down on an existing position.

Very often, emotions such as fear will cloud investors to make the wrong decision – taking profits too early or holding on to a loser for too long.

One way to take emotions out of the equation is to allow a professional manager to manage on your behalf.

With a professional portfolio manager, there is a proven investment process in place and the ability to stay focused on the investor’s objectives.

This can make a big difference to an investor’s long-term ability to optimise returns.

@TigerStars 

@CaptainTiger 

@MillionaireTiger