value and opportunity

First of all congratulations to our German team. I think they’ve earned it, especially considering the setbacks (many injured players, many critical voices etc.).

Clearly, football cannot directly be compared with investing, but among sports, football is pretty unique as luck plays a much bigger role than in other sports. Compared to basketball for instance, in football for a single match luck (or better randomness) is much more important as the number of goals is usually pretty low. The same goes for investing, where over a single period of time the results are also pretty close to random and only over longer periods of time (and on a compounded basis) skill emerges.

Following are 7 very subjective things to learn and the post is clearly written under “the influence” of yesterday’s victory:

1. Keep your eyes on the ball

Although Lionel Messi did not win the cup, there was one situation where one could learn a lot from him: The penalty shoot-out with the Netherlands. The Netherlands won the previous shoot out against Costa Rica because the Dutch Goalie influenced the Costa Rican players so much with his clownery. Against Argentina, the other Dutch keeper tried to do the same and made some crazy moves against Messi who was the first to shoot. If you watched Messsi, I had the impression that Messi didn’t even notice the goal keeper. He kept his eyes on the ball for the whole time until the ball was in the net. Here the picture how he shot:

Lesson for any investors: Don’t listen to or watch the “crazy” guys who jump around in front of you” and tell you the world will go up in flames or that everyone will get rich. Keep your eyes on the ball, i.e. concentrate on finding good investments and avoid bad ones.

2. The best team wins, not a single super-star

If you look at the outstanding single players in the tournament, only maybe Thomas Mueller would be considered as a “Superstar” from the German team. My internal ranking would put him behind Messi, Neimar, Robben and Rodriguez (Colombia). In the final, Germany played against Argentina, with Messi, who potentially is the best player on an individual basis that football has ever seen. Nevertheless Germany won because they simply had the better team.

In investing, the same lesson is often learned hard by investors. Many investors are searching for the next Apple or Tesla, the super-star stock which will make them rich in short time. For long term success however the likelihood of winning is much better with a good portfolio of good companies at reasonable prices than a collection of overpriced potential super-star stocks. Often, it turns out that especially the good company at a reasonable price turns out a super-star at some point in time as Mario Goetze did.

Plus, sometimes much underappreciated players turn out to be great value, like Benjamin Höwedes. A lot of people criticized Löw for nominating him at all. Technically, he was clearly not on a level with the rest of the team but he showed fantastic fighting spirit and played all 7 games and almost scored a goal in the final. In investment terms he would have been the typical “deep value investment”, bought cheap and then tripling in value.

3. Each time is different – don’t rely on statistics alone

If a guy like John Hussmann would be a football analyst, he would have told anyone that Germany would have no chance in the final because statistically never ever did a European win the world cup in “America”. The last 6 times the world cup was played there, always a Latin American team took the title. As in investing, the problem with backward looking statistics is that although this is a very important aspect, there is no “causal” link for this. In 1950 in Brazil after World War II for instance only 13 teams competed and 7 of them were “American”, the same in 1930. In the early world cups, often many very good teams were missing for some reason or the other, so constructing any “laws” out of such long gone and irrelevant past events is not always useful.

So yes, it is interesting and entertaining to look at statistics but often they are not very useful for predicting singular events.

4. Leave out (too many) emotions

Although a certain passion for football and investing is certainly a help, too much passion or emotions are often not good. I have rarely seen so many men crying as during and after Brazilian matches. Coach Scolari seems to have “motivated” his team in a way that they felt responsible for the future of their whole country. It was also a strange sight when they held up the Neymar jersey before the match against Germany. Of course, everyone is smarter after the match, but maybe it was not such a good idea to mourn about something you cannot change before the match.

In investing you should also be careful with too many emotions. You should never love or hate a stock but try to see it through a neutral “risk/return” perspective. Otherwise you will run the danger of losing focus and get caught up with a lot of behavioral biases like loss aversion etc. etc. Also politics and investing don’t mix well as Charlie Munger has remarked several times.

5. Defense is important, but don’t forget the offense

The final 4 of the world cup included 3 teams with a really good defense (Netherlands, Argentina, Germany). “Defense wins championships” is basically equivalent to the famous Warren Buffett quote “Rule No.1 is never lose money. Rule No.2 is never forget rule number one”. However, ONLY defense does not win championships as especially the Dutch players had to experience. For me a similar mistake in investing would be to just to sit only on cash and wait for a potential crash. This strategy can work but has some risks. For me the better strategy is like the German team to build on a strong defense but also take some measured risks in order to “create opportunities” in the offense. Yes, you will increase the risks for counter attacks / investment losses, but if you manage to create an overall positive expected value you will win in the long run.

6. Sometimes things do change fundamentally

When I grew up, Germany always had strong national teams, however their main strength was their will to win and their physical power. German players were, with some exceptions technically inferior to most other nation’s especially southern European teams and Latin American ones. There were many theories why, but in general it was just considered a natural fact that especially Brazilians are the better individual football players.

Fast forward to 2014: Not only did Germany win the world cup but also they were considered to be the technically best playing football team. Brazil had Neymar, but the other players were technically rather inferior compared to for instance also Dutch players and to German players like Özil, Goetze, Khedira, Schweinsteiger etc. In Germany, there seems to have been a systematic approach to promote technically gifted players much more than in the past. Also, referees today (with some exceptions) protect technically good players much more than they did in the past by more quickly giving yellow and red cards to unfair players.

Although it is still the same ball, field, goal and 22 players, there seemed to be a fundamental shift how football is played and not all nations seem to have made the necessary adjustments.

For me something similar can be seen in economic life. Currently, many industries undergo very deep changes be it because of the internet, mobile phones, emerging markets or renewable energy. On an individual company basis, assuming a “mean reversion” is very dangerous in such times and I am also not sure if the overall market level “mean reversion” camp might be missing something. I don’t want to justify current market levels either, but I think it is important to understand that calculating (more or less sophisticated) historical averages does not explain fully what is going on in the world.

7. Don’t take things too seriously all the time

I don’t know the details of the other teams so well, but for me one of the very interesting aspects of the German team was that they genuinely seemed to have a really good time over those 8 weeks before and during the World Cup. Although they were hundred percent focused during the matches, there seemed to be a lot of humor before and after matches. Even right before the final when the cameras showed the teams in the hallways leading to the Maracana stadium, Mueller was making jokes with Lahm while they were waiting. Before the tournament, many people criticized that the German team is “too nice” and that they will not stand a chance against their mostly gangster style tattooed international opponents.

But in the end I think it is important to step back somehow and even be able to laugh about own mistakes as Thomas Mueller did when he did his “slapstick” free kick approach:

Often, taking a break, cracking a joke or two gives you the chance to regain your strength at and away some of the pressure. If you are a reader of Warren Buffett’s annual shareholder letters, you will notice this pattern as well….Should we call now Warren Buffett the “Thomas Mueller of Investing” or the other way round ?

Final Disclaimer:

As always, never take anything on this blog as investment advice, especially not this post created less than 24 hours of the historic German victory…..