PORTFOLIO POINT: Notching up a respectable score with your investments means paying attention to the basics.
In 1878 Australia and England first joined in sporting combat and 5 years later in in 1882 the legend of the burning of the bails and The Ashes was born. Today The Ashes remains the pinnacle of test match cricket and there are lessons we can take from this contest, many of which apply equally to cricket and investing. We deliver a six-ball over of investment lessons to get your batting average up.
Ball 1: Back to basics
“Keep it simple. Attend to the basics first; if you can’t do that, then more complicated things will be impossible anyway.” (Richie Benaud, absolute legend).
In cricket the basics are batting, bowling and fielding well. In the first 2013 Ashes series played in England, the Australians were completely outclassed in these areas and lost 3-0. Later in the same year in Australia the tables were turned and Australia came out the victor 5-0. Likewise, when it comes to investing the basics include time, risk and diversity – you should focus on them with a similar single-mindedness.
The Ashes contest has been around since 1882 and it starts gain in July 2015. Knowing this enables cricketing authorities to make informed longer-term decisions. Likewise, you should know what your investing timeline is and work to it. The longer your timeframe the better, as short-term results can sometimes obscure the true potential of long-term investments.
When you think of cricketing and investing greats two names sit loftily at the top of most lists: Don Bradman and Warren Buffett. Both had an unparalleled mastery of the basics of their respective fields and both avoided taking unnecessary risks.
Bradman, the greatest batsman the game has seen, hit just six sixes during his entire test career. He avoided flashy shots, preferring to safely hit the ball along the ground with less chance of losing a wicket. By way of comparison, during the 2013/14 Ashes season in Australia the Australian team hit 36 sixes to England’s total of 12.
As revered ABC commentator Alan McGilvray said of Bradman: “Every ball was computed, it’s worth analysed, its dangers identified and its dispatch programmed with mathematical certainty”.
Likewise, Warren Buffett believes in sticking to the basics of safety-first investing. “You only have to do a very few things right in your life so long as you don’t do too many things wrong”. Perhaps it’s no coincidence that Bradman spent most of his professional life as an investment adviser!
So ask yourself: are your investment decisions made with the laser-like focus of the now retired Ryan Harris or are they a tad wayward like a delivery from Steven Finn? Are you the type of investor who is continually trading, seeking the latest hot stock? And to what end?
In the words of Buffett: “We believe that according the name ‘investors’ to (those) that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic’.”
Ball 2: Get your on field team selection right
Will the team formation and strategy be defensive or attacking? What combination of players will best complement each other? What combination will be most effective in the playing conditions and against the opposition?
These are crucial questions that both Australian coaches (Darren Lehman for Australia and Trevor Bayliss for England) will be weighing up throughout The Ashes series.
In many ways, investing is no different. You first need to determine your defensive and growth mix. Then you need to investigate the best alternatives through research and analysis of the many investing options available. You evaluate market and economic conditions, examine opportunities, and use all this analysis to determine your final selections to get your team selection right.
Ball 3: Invest for the long term
When you invest for the long term you need to make some brave decisions and stick with them through the inevitable cycles. In cricket sometimes the best decisions are the long-term ones, such as selecting young players for the future of the game.
From recent Ashes series the best examples of decisions made with a view to the long-term ramifications were the inclusions of England’s Joe Root and Australia’s Steve Smith. Root was dropped for the fifth test in the 2013/14 Ashes series yet was recalled for a one day series in the West Indies where he repaid the selectors faith in him by being named Man of the Series.
In 2010 Steve Smith was selected for Australia primarily as a bowler and made little impression. However, his batting stood out but because of his bowling failure after 5 tests he was dropped for 2 years. Since 2013 Smith’s batting has gone from strength to record breaking strength and in June 2015 he was named the second youngest ever batsman to be ranked number 1 in the world (second after a certain S Tendulkar). Long-term investment in these players can bring clear rewards.
When it comes to investing you should keep a strong conviction in your long-term investing strategy through the inevitable highs and lows. Cricket teams and portfolios alike perform the best when there is little chopping and changing but rather long-term certainty. A revolving door policy of poorly performing investments in the short term takes its toll on performance: chasing returns can lead to lower returns and the costs of trading (fees and taxes) eat away at portfolio performance.
Ball 4: Who pays who?
Cricket players today maximise their income if they play for the Twenty20, One Day Internationals and then the test teams (in that order). The massive money available in the IPL clearly gives players a personal incentive to overstretch themselves, prepare less for tests and develop techniques that only suit the short forms of the game.
Question: Do you think the fact that Michael Clarke no longer plays ODIs or Twenty20 for Australia contributes to his test performance?
Likewise the way your advisor is paid may create conflicts that impact on you. Follow the money: stockbrokers can’t make money if you don’t buy and sell shares; most advisors can’t make money unless you invest in managed funds via a platform; and insurance agents are reliant on the commissions they earn on your policies. In the words of Buffett “Would you ask your barber if you need a haircut?”
Develop a long-term partnership with an advisor you trust who will work in your best interests. Cricket partnerships have long been the key to success – Jardine had Larwood (hmmm); Lindwall had Miller; Lillee had Thomson; and McGrath had Warne. We believe fixed-fee advisors are the partners you should trust for strategies that are best for you. Then ensure you implement their advice effectively – “Advice isn’t worth anything if the person can’t use it properly.” (Bill ‘Tiger’ O’Reilly).
Ball 5: Review the selectors off the field
The selectors choose Australia’s and England’s cricket team; when it comes to investing either you do it yourself or you seek professional advice. England’s chairman of selectors, James Whitaker, and the Chair of the England and Wales Cricket Board, Giles Clarke, completely mismanaged the axing of Kevin Pietersen from the England team which has been an time wasting and demoralising distraction for the English cricket team.
When it comes to your adviser, do they take responsibility for their advice? Do they have the necessary skills and expertise for your circumstances? Do they specialise in areas such as SMSFs? Do they encourage you to ask questions and learn more about your finances?
You should only ever select an adviser you respect; this ensures your interests are aligned. Keep in touch but don’t smother and don’t be afraid to pay for specialist advice (getting the right piece of advice from the right person at the right time is nearly always worth the price).
Ball 6 – Avoid the on and off field distractions
Distractions can be fun for the public: Kevin Pietersen’s ongoing love/hate relationship with the English test team, David Warner’s ongoing stoush with Joe Root (top tip: stay away from the Walkabout Pub in Birmingham), English batsmens’ fear of Michell Johnson’s pace. Unfortunately, such distractions invariably detract from performance. Invariably you hear the fewest off-field distractions from the team that actually wins the Ashes series? It’s because they focus primarily on their on-field performance.
Investing distractions, such as the hottest stocks or the funds of the month, will always come and go. Sensational investing headlines will sell papers but it is your job to filter all that investment noise and focus on ensuring your investment scorecard shows a healthy, long term batting average.
In my opinion, my wife is the absolute worst of all sports fans, she supports England and/or whoever is playing Australia. However, for some strange reason she believes that my support for Australia and/or whoever is playing England is totally unreasonable. Suffice to say, we have some slightly confused and ever so diplomatic, cricket loving children.
I like many of you look forward to sleepless night over the coming month as the Ashes battle is rejoined in 2015. We pull up stumps with four wrong’un questions for you to ponder:
- Which commentators do you trust: Channel 9 or ABC? An advisor tied to a financial institution or one who is not?
- Do you pick the same team for conditions in England and the sub-continent? How do you approach domestic versus international investing?
- Do you know why and when the third umpire will step in? Do you know why and when the tax office will ask you about your SMSF?
- Do you prefer five-day tests or Twenty20? Is your appetite more for long-term investing or for the high-risk, short-term approach?
Note: An earlier version of this article was first written and published in Eureka Report in 2011 following Australia’s loss in the 2010/11 Ashes series.