Investment Lessons from the English Premier League

Today’s guest post is by WalekPeppercommers Armel Leslie and Dmitriy Ioselevich

TThe English Premier League (EPL) is one of the oldest and most followed sports leagues in the world. Many of the world’s most recognizable brands belong to this league—clubs with a reputation for success that, in some cases, dates back to the 19th century.

But what can football (or soccer) teach us about investing and investor perceptions?

One of the things that make the EPL so popular is the intensely loyal fan base that always expects the most of their club, idealizing each player’s performance and dreaming of championship glory. This is a trend that is common to most major professional sports, but it has also become prevalent in the investment industry.

Retail investors routinely treat their favorite stock or investment the same way they treat their favorite players and teams—always expecting the best. (Institutional investors are sometimes guilty of this behavior as well.) This is a dangerously flawed way of thinking.

To see why, consider a club such as Manchester United, which has a long track record of success and each year is expected to contend for the title. You might compare Man U, which is itself publicly traded, to a company such as Apple. Both have reputations for being the best in their respective industries and are expected by shareholders (i.e. fans) to continue to perform at a high level.

On the other hand you have a club such as Liverpool, which dominated in prior decades but has not won a Championship since 1990, two years before the Premier League was even formed. An apt comparison might be Microsoft, which similarly led the first revolution in computers and is now stuck playing second fiddle to Apple. Relative newcomers to the heavyweight division such as cash-happy Chelsea and Manchester City have their own counterparts in social networking giants Facebook and LinkedIn.

Predicting the future is always tricky, but both fans and investors alike can heed the following principles to guide realistic expectations of where their teams and investments might be heading:

•    Look at the underlying assets of the organization and remember that “past performance is no guarantee of future success” (or failure). Just ask David Moyes, who fell into the boots of the legendary Sir Alex Ferguson and  has since shepherded Man U to their worst start to a season in 24 years.  Both fans and investors need to be completely objective and not fall in love with a name or brand.

•    Beware of teams that chop and change at the first sign of possible trouble because they run the critical risk of not thinking about the long-term. Buying high and selling low (often in a market downturn driven panic) is as disastrous for an investor as an EPL team firing the coach before he has a chance to prove his worth. Both events exhibit a short-term mentality and a “want it all now” attitude that will likely fail in the long run.

Protracted underperformance however should be dealt with and portfolio managers fired if they are unable to deliver on a medium to long-term horizon. After all, the bottom three teams in the EPL are relegated to a lower division at the end of each season, the ultimate punishment for not delivering on promised returns.

Evaluate how individuals play as part of a team, not just how good the ‘stars’ are individually. What’s key is to analyze whether the overall team and management has what it takes to deliver a repeatable process and success over the long-term.

Easier said than done as many EPL fans are born into their allegiances, but there is no excuse for investors that fall into the same trap in a game where losing has a whole different meaning.

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