The psychology of behavioural finance has been something that has fascinated me for a long time and after discovering the Football Index Platform (FIP), I have been surprised how well the behaviour of traders and investors mirrors the more historic established markets. In contemplation, it is a market and as such why wouldn’t the normal rules apply?
Everyone knows how to make money in a market. It is simple. You buy low and you sell high. However, the problem with that strategy is that you have to know when markets have bottomed out or hit the ceiling. You add further complication when you start applying a filter and start saying that you want to buy futures in particular individuals over and above others. So in trying to simplify and maximise gain you added additional risk and some very real and challenging mathematic equations to your decision making.
Then what happens when you get it wrong? You sell one future (a) and purchase a new one (b) and it is the wrong call. Future (a) is up 10% and Future (b) is down 10%. You haven’t lost 10%, you now have a 20% swing gross of any commission and trading costs. Get those calls wrong three times and you are watching the market and everyone else race away from you.
So if you cannot 100% know if an individual futures or a portfolio is peaked or at its bottom, what is the answer? Behavioural finance actually gives us the answer. Don’t bother trying, just simply invest in the whole of the market and ignore the noise.
At a later date and in other articles, I will talk about the power of compounding and portfolio construction but for the time being I want to concentrate on the FIP market as a whole. If a market is increasing overall, what does it matter that individual futures are bouncing up and down like a yo-yo, or that on a regular periodic basis you are dripping money into the market? The answer is, it doesn’t!
By taking such an approach, you are going to underperform other people in the short term. Not sure you would be expecting that comment, but it is the truth. It is also true you will outperform other people in the short term. However, and this is key, you have to take the path of investing in ‘weird’. Investing in ‘weird’ is a concept that dictates you do not follow the herd mentality of other traders. Widen that thought process out, if 50% of the worlds wealth is owned by 1% of the population, are those 1% doing the same thing as everyone else? Absolutely not.
The majority of those 1% will have conquered their flight or fight hangover from the days in which we were all swinging in the trees and ate the fermented fruit that had fallen to the ground. Those 1% will have the courage of their convictions and have realised that wisdom and discipline separate them out from all the rest. Successful people throughout history also leave behind road maps on how to achieve this. The problem is, the masses ignore those directions.
If you are regularly dripping capital into the market, not only will you negate the necessity to time it, you will always benefit from the increase and falls. That is very much the key. How you suddenly start looking at the movement in your portfolio fundamentally changes. If the market is up, you are making money, if the market is down you are all of a sudden looking at January sales and happy days and sunshine to come.
But what about time? What about the fact that players get injured or they retire? If investing is about growing your capital, then by holding the whole market you are at least mitigating those very key factors. Daily observance tells me that if something like a key injury occurs or say, in the instance of the legendary Zlatan, a pre-retirement transfer to the MLS, you see the money taken out of that particular future and invested in another future. If you believe in the long term holds, then you are looking beyond 3 years up to around 12 years. That is not a problem in the life span of a footballer and as such you are removing those risks and the difficult decision process of getting the timing of any individual future right as to its peak or conversely its bottom out. Why? Because it no longer matters. If a player’s future price drops off the face of the cliff, you already hold the other player which then sky rockets as a result. Overall, with these cycles and the injection of new investment, you are now focusing on market growth as a whole.
Then the magic of long term holding kicks in, keep re-basing those trades every three years and keep purchasing IPOs and something amazing happens. You outperform everyone. There is a cost to everything and in this strategy, it is discipline, belief, time and not listening to the ‘noise’ on those days when everyone is talking about how much money they have made by short term active trading. You have to remain consistent. Something that is not always easy.
Finally, a key lesson from behavioural finance studies. You are not the individual footballer, so you have no control on how they perform or how they look after themselves, if and when they agree to sign a new contract or hand in a transfer request. All you simply do is control risk and then enjoy the ride!
The comments above represent my own personal views and do not constitute any form of advice.