Kit Winder here. Boaz is away and so I’ve come to write to you about a remarkable event last Sunday.
Easy like Sunday mornin’
I woke up like any other Sunday, relatively early.
But for me, this Sunday was a bit different to most others. I had eschewed my usual plans of trekking down to some charming little corner of Surrey to play cricket. I had a firm appointment that morning, one which trumped any other offer.
My dad cut short a long weekend to meet me at home, 9.15 sharp.
The Cricket World Cup final wasn’t due to start until 10.30, but coverage started at half nine, and we had to get the tea and biscuits lined up beforehand. Didn’t want to miss a word of the build-up.
Cricket is somewhat like investment in that way.
Both hold a firm grip on my attention and interest, and for much the same reason. Ultimately, their complexity makes them both a source eternal fascination.
And for the same reason, both produce an incredible amount of commentary.
The amount of words churned out by financial journalists in the build-up to Fed meetings, the endless interviews on Bloomberg and CNBC… and the opinion pieces by sports journalists and former players, some more eloquent than others.
And why do both create such huge swathes of content? Because we consume it gladly, and in great quantity.
In the end, neither has any bearing on the events themselves.
Predictions of World Cup success have about as much bearing as predictions of changes in interest rate policy.
It’s possible to make broad statements – England are favourites, they have the best side, economic data is weakening, the Fed is likely to cut rates at some point this year… but correctly predicting the outcome of any one meeting or game is normally a fool’s errand.
Yet there we sat, analysing each view, swapping opinions, stories, and predictions of our own.
As in investment, we would later only recall those prognostications which came true.
“Could be a day for Jos Buttler,” was one of mine. In case anyone’s keeping score.
Reversion to the mean
New Zealand won the toss, chose to bat first despite bowler-friendly weather conditions. They started well, with England failing to take the early wickets which had characterised many of the Kiwis’ games thus far.
Sky Sports have created a data-driven “Win Predictor”. Presumably it started with England as slight favourites, but in that early phase, it swung in New Zealand’s favour.
Then, glorious work from Liam Plunkett, England’s middle over specialist, removed their captain and star batsman, Kane Williamson. This was followed by a series of wickets for England, and the Win Predictor swung firmly in our favour.
New Zealand finished the first innings on 241, well within England’s capability according to the predictor, which now had us as firm favourites.
“This won’t be a walk in the park, we’ll still have to dig ourselves out of a hole at least once more,” we pontificated from the sofa.
Because what we humans can do, which apparently the win predictor can’t, is factor in change and randomness.
Reversion to the mean is a powerful force in many walks of life, and cricket and investment are full of it. The win predictor was extrapolating directly from past data, without adding in one or two unknown unknowns. There would be more than a couple, as it turned out.
In this case, England’s batting got off to a horrid start, losing our world-beating opening batsman for their lowest scores in five games.
Then came our ever-reliable, always delivers (nicknamed the postman), number three Joe Root. He too, however, played what he would later describe as the worst innings of his professional career.
When he eventually succumbed to a bout of psychological madness that we amateur cricketers can relate to with consummate ease, the Win Predictor edged back towards even. (Note: cricket can claim to match investing for the importance of psychology.)
Then our captain Eoin Morgan strode into the middle. As of last month, he is the record holder for the most sixes in a single innings (17). But this was a different day, with a different pitch and different bowlers, and he too struggled and fell cheaply.
Now with England on the ropes at 70-4, the Win Predictor swung into New Zealand’s favour. England were in deep trouble.
This was reversion to the mean in full flow. “We said it wouldn’t be straightforward,” we patted ourselves on the back.
The pendulum swings
I’m currently reading the follow up to Howard Marks’ wonderful book on investing The Most Important Thing. In this new volume, Mastering the Market Cycle, he repeats his view that markets, as the product of human psychology, behave like a pendulum.
In the markets, greed and optimism push the pendulum far above fair value, before it realises it has gone too far and swings back towards equilibrium. But as it reaches that mythical Goldilocks point, it has gathered too much momentum and ends up swinging back beyond it. Fear and pessimism push the markets down into the dumps, where once again value can be found, and the buying starts to push the pendulum back towards, and beyond, equilibrium.
It’s a wonderful analogy, and one worth remembering at the moment I would add.
And it doesn’t just apply to investment.
England’s World Cup final performance mirrored its progress through the tournament in many ways.
After a bright start, made easier by weak opposition, they faltered, perhaps having believed they could mosey gently to victory, without needing to exert themselves. An easy trap to fall into when you are not only the favourites, and on home soil, but widely agreed to be the most destructive and impressive one-day cricket team of the last three years, probably ever.
As in the group stages, England faltered. The win pendulum swung past 50/50 and now favoured New Zealand.
Was that the end of it? Not by a million miles.
The events that would unfold over the following two or three hours were enough to render me genuinely speechless. I was so tense I actually had a bad back the next day. The emotional hangover the next day was worse than any that trying to keep up with Boaz’s Scottish liver had done to me before.
Does past performance predict future returns?
England were favourites. It had the equivalent of a booming economy and negative interest rates.
We have more than a couple of the world’s most dangerous and attacking batsmen, plus multiple 90+ mph bowlers and good variations in the middle overs.
We had beaten New Zealand fairly comprehensively in the group stages. We were on hot form, having dispatched a strong Australia team in brutal fashion in the semi-finals. We had beaten the other three “top four” teams in our last three games.
And yet all of a sudden, here we were, looking down the barrel of a humbling, hope-crushing, heart-breaking World Cup final defeat.
All of our form batsmen had failed. Only Ben Stokes remained, with Jos Buttler, who had so far failed to live up to his pre-tournament hype.
Does past performance indicate future returns? This is the ultimate question in investment. It could be perhaps be better phrased as “to what extent does past performance indicate future returns?”
Do you trust form? Does the fact that the S&P 500 has been in for a bull market since 2008 (its longest ever run) mean that it is more or less likely to go up in the future?
Choosing to invest in a stock almost always involves having an answer to this unanswerable question.
And in cricket? Well, our unfaltering top four had faltered, when it mattered most.
Stokes had batted well twice before in the tournament, only to fall agonisingly short at the end. Buttler had made only a solitary 50 in the last nine games.
And yet here he was, hitting into gaps, and finding the middle of the bat as if he were in the form of his life.
Slowly, Buttler and Stokes halted the swing of the Win Predictor pendulum. It stopped falling New Zealand’s way, and started to creep slowly towards evens. Gently getting four or five every over, the pair looked to stay in the chase, planning to do the bulk of the boundary-hitting in the last six or seven overs.
It’s not how England have played most of their cricket over the last few years, but in this instance, it was the right way to go.
Buttler got past 50 for only the second time, hit a couple of boundaries – and soon the inevitable pendulum had swung once more. Stokes was past 50 too. The predictor has us as easy favourites again, with very little of the game remaining. We started to breathe normally again…
Just as soon as you take something for granted in investment, it changes. The housing market in the US will always go up? See: global financial crisis.
EU government debt is zero-risk? Let’s just see how the next few years go…
And so it was again in the World Cup final. After two gruelling, nerve-scraping hours, we started to remember what hope felt like. Two brilliant players on 50, tired bowlers, not that far to go… but the cricketing gods were far from finished. Buttler would slice one out to be caught out at deep cover, before Chris Woakes, Liam Plunkett and star young bowler Jofra Archer were also removed cheaply.
Stokes now required 34 runs from just three overs. And being harsh, he’d hardly made it look easy up to that point. He wasn’t in mercurial form by any stretch.
And, as mentioned, he had made valiant efforts previously in the tournament, only to fall short on both occasions.
But then, a six. And another. And a four, some great running, and a bit of luck too. Two runs required off the last ball… and we only got one.
Stokes got us to tie the game, and eventually got us over the line in cricket’s version of a penalty over – the Super Over. One over per side, a maximum of three batsmen. New Zealand would have to surpass England’s total of 15 to win, because of a technicality over who had scored more boundaries in the game.
How many did they score? You guesses it, 15. A tied game, a tied Super Over, and England win the World Cup. Brilliant.
Misfortune and injustice in some ways characterised the loss for New Zealand, but I would say it was less unjust than if they had actually won. England were the superior team for the three years leading up to the tournament, and during it. England deserved it. They are the best team in the world, and now they’re world champions.
In the end, you could say past performance was a decent indicator of Cricket World Cup performance. But it played out nothing like how we thought. There was an incredible array of ups and downs, surprise results, and swings in form and fortune.
England may have been favourites and eventual winners, but volatility was pretty severe along the way.
Stockmarket volatility has been falling steadily since 2008. But don’t forget about the pendulum, folks.
“Best game in the world, worst game in the world”
My old coach and mentor had this great refrain about cricket.
Cricket is the fastest game in the world, and the slowest game in the world,
The simplest game in the world, and the most complicated too,
It can be longest game in the world, or shortest game in the world,
Cricket can give you the best day of your life, or your worst.
Cricket is the best game in the world, and the worst.
You could easily replace “cricket” with “investing”.
Both involve an eternal learning curve. No cycle is the same. No game, no day in the markets, no debt crisis or batting order collapse is the same.
Both have their problems, and their challenges, their mavericks and their heroes. Buffett, Buttler… Marks, Morgan…
But the complexity and psychological element which keeps us enthralled is present in each, and that is why people can be fascinated by both, indefinitely.
The World Cup final for England equates to selling out of your five-year-old $12 bitcoins at the height of the bubble in 2017. For New Zealand, it was 2008.
Ecstasy, and heartbreak. But for both, the great game continues. Bitcoin crashed then, and is back on the move now. The American stockmarket, crushed at the time, is breaking records these days.
England were an embarrassment at the last World Cup, in 2015. Today, the pendulum has swung firmly in the other direction. Since 2008, the markets have recovered, and we’re now in the longest bull run in history.
As with everything though, it won’t hang around forever at this glorious, blissful extreme.
Have a great weekend everyone,
Kit Winder
Investment Research Analyst, Southbank Investment Research
PS Cricket fans, get in touch with any other investment/cricket comparisons! [email protected].
Category: Market updates