My favourite sport is Football and the English Premier League (EPL) is tops. Ever since they started airing it a decade or so ago, I have been an avid watcher of club football. Now places like Burnley and Norwich are as familiar to me as is Manchester or Chelsea. Never mind the fact that on the few occasions that I have been to the UK, I hardly ever ventured out of London. But in one of those visits, I did happen to go to Leicester. This city, quite near London, has a dominant Asian population and since my business involved interacting with them, I was there. With some time on my hands one day, I decided to visit the local football stadium, now known as the King Power stadium. The EPL season was over so I just went to the empty stadium and drank in the atmosphere. Wonderful. I did this again, later, during a visit to Barcelona and went to Nou Camp, the home of the famed Barca team. What a visit that was! Will never forget that one, for sure.
The reason I gave that background was because of an event that occurred a week ago. Leicester, out of all expectations in the last season, lifted the EPL cup, defeating much more fancied teams in the bargain. Never really thought one day that the stadium I had been to, would boast of the League champions! In Sunday’s papers, the team positions were all published (this year’s League has another weekend of matches to go- to decide the other places). Reading over that team positions brought out something so basic pertaining to trading that I thought I should share that thought with my readers.
No one expected Leicester to win (they were 5000:! odds at the start of the season!) but yet they did. They didn’t have any stars unlike other teams, but still they finished well ahead of the rest. For eg. Manchester City had spent more in a year on their players than Leicester had spent in their entire 128 year history! They had a coach who had never won a title at the EPL but he was good enough to rustle up a team that took the cup! Was it some sort of dream run? Was it just luck? We will never know for sure. Maybe it was Football version of the Lollapalooza effect of Charlie Munger!
But there are remarkable parallels to trading and investing in this story. We all believe that we must have the best of information, the best brokers with the finest rates, the best software to throw up the analysis, the best network for us to hear the word etc. etc. But none of these really guarantee any silver at the end of the day, just as all those top drawer players and all the money could not make Man City grab any silverware! The score card of Leicester when compared to the other teams tells all the story. Here is the table of the top 5 teams.
Now look at the numbers of Leicester. Not only did they win more games than all other teams but they also lost the least number of games. Further, they slammed a very high number of goals in the matches they played. This enabled them to offset the impact of goals scored against them which is on par with the other teams. Note that they also had a large number of draws (prevents losing!).
This is essentially how we need to operate in the markets. We need to win in a large number of our trades and we should lose in very few. This will keep the accuracy ratio high. A good win/loss ratio in trades is a must for a healthy equity curve. If this is out of whack, it puts too much pressure on the winners to deliver the results. Further, when you cant win, try and play for a draw so you wont spoil your win-loss ratio. Then, try to win big on the occasions where your trade is a winner. Finally, the smaller the amount of money you lose in your losing trades, better that winning amount vs losing amount ratio is going look. Even though the numbers are not too far away from each other for most teams, look at the number of points that Leicester managed to tag on! That is what a good win-loss ratio does to your account- puts it solidly in the black!
Leicester’s win shows that anyone can do it, on his day. But what it required was some solid and consistent playing. In most of their matches, Leicester would be 1-0 up before half time! That showed their dedication and focus, to get ahead, no matter who they were playing against! Claudio Raniery refused to talk about a Cup win even when it was appearing almost certain. That is the correct attitude. Be focused on the job of winning rather than in tasting the smell and sound of victory prematurely. In trading and investing we are almost always focused on the end result while completely overlooking the process of creating that win. Raniery never made that error.
We should all draw lessons from this dream win of Leicester. You can win if you have faith in yourself. If you stick to what needs to be done. Saying that is so much easier. But then real life examples are what we need to use to draw inspiration and power our self to higher highs.