Do the stock market and the transfer market have anything in common?
Thursday at 11:59 pm was the deadline for professional soccer clubs in Spain to sign new players. That means it’s a good time to ask ourselves whether we, as investors, could learn something from sporting directors and vice versa. Are there similarities between the stock market and the club transfer market that we could analyze to reach conclusions?
For results that exceed expectations, both stock market investors and athletic directors pore over the market in search of inefficiencies. In other words, they try to find undervalued assets, whether shares or players, that will contribute to increasing the profitability of their portfolios or to driving the performance of their teams over and above the available spending budget.
If the markets were perfectly efficient in both cases all the time, this task would obviously be impossible to conduct. Each asset would always be priced at exactly what it is truly worth. This would mean that no investor would be able to beat the overall market consistently, nor would a modest team be able to achieve better sporting results that another with more financial muscle.
However, reality constantly shows us that this situation of permanent market efficiency is false. It’s not always the wealthiest team that wins the championship, and there are certain investors who have been able to generate extraordinary profitability over the years. Interestingly, the basic principles that have enabled this group of investors and club managers to achieve extraordinary results and beat their competitors are actually quite similar.
We start with the premise that the work of both investment fund managers and sports club directors involves making decisions in environments of uncertainty. Investing in a listed company must be done based not on the profitability offered by past share performance (even though many believe the opposite), rather on the possibility of generating cash flows in the future. Likewise, sports clubs shouldn't sign players based on their performance on other teams, in other contexts, rather they should think about how the players will help their squad achieve success in the coming years.
In this environment in which complete information is lacking, the individuals involved in the financial market and the transfer market are sometimes subject to emotional bias, making mistakes when allocating a price to certain assets, whether shares or players. We all remember stock market crises and bubbles, as well as players of questionable performance who warranted astronomical amounts of money and low-cost players who brought with them glorious eras for their teams.
The work of an investment and an athletic director consists, primarily of seeking out these inefficiencies, identifying them and using them in their favor. So, it is essential to make sensible decisions using criteria designed to fulfill an objective that is easy to establish but difficult to fulfill: repeatedly placing the odds of success in our favor. But are there patterns or common lessons learned among the investors who have beaten the market and the athletic directors who have made their teams grow most.
First, both groups of professionals tend to agree that, in their respective markets, there’s normally no such thing as “a steal”. If a share or a player is good and is attractive to the entire market, they will probably not come cheap. Finding undervalued assets that are good and cheap means we have to get used to them having very little esteem or recognition in the rest of the market. However, this is something the brain isn’t ready to accept, which is precisely what leads to these inefficiencies.
Second, in the search for bargains, successful investors and athletic directors often end up looking in places in which others simply never end up looking. We’re not saying it's impossible to find good investments among the shares or players that are most popular and well known to the public and analysts. But in this group of assets, it is much more difficult to detect steals that were missed by everyone else. That’s why some investors look for opportunities in sectors of depressed business activity, while certain athletic directors send their scouts to competitions that are less popular with their competitors.
Third, these professionals often ask themselves what is motivating the other side and they try to find forced sellers. Something that stock investors are obsessed with is trying to understand what the people are thinking when they are ready to sell their shares in companies that the former want to buy. When your attitude goes against the rest of the stock market or the consensus of the soccer world, it is important to be very clear about the angle or motivation you're seeing that everyone else is missing. When the answer is that the other side is simply forced to sell for whatever reason, that may lead to some excellent opportunities.
Finally, it is absolutely essential to be patient: the best options often take time to show themselves and the processes may take a while to bear their fruits. Great opportunities on the market are few and far between. If the right opportunities don't come along, it’s best to lay low, instead of rushing in and making a bad decision that you’ll regret later on. More often than not, buying an asset out of boredom or pressured by those around you (the market or the fans) doesn't end well. In the stock market as in the transfer market, success shouldn’t be measured in years or seasons, rather in cycles.
Luis García Álvarez, CFA
Investment Fund Manager, MAPFRE AM