Written by Tom Stanley, Investment Adviser, 5th September 2022
While this year has been a painful as an investor, it has also been painful to be an All Blacks fan – The loss to Argentina in Christchurch being no exception.
If you have ‘tuned in’ and watched every All Blacks game year to date, you may appreciate parallels that can be drawn between markets, and the All Blacks recent performances:
- The year to date market sell-off through June could be likened to the All Blacks’ first ever home series loss to Ireland.
- The bounce back in markets in June/July could be likened to the impressive performance of the All Blacks vs South Africa at Ellis Park in early August.
- Saturday week a go’s first ever home loss to Argentina happens to coincide with markets trending lower again.
I am tempted to dive in and talk to recent market moves, but that’s the job of the attached market commentary… I am also tempted to give you my two cents around the All Blacks performance… But this is not a Herald opinion piece. My note this month was inspired by Nasim Taleb’s book “Fooled by Randomness” alongside a series of recent All Blacks focused articles such as “By the numbers: All Blacks make more history for the wrong reasons in loss to Pumas”.
Today’s note looks at the idea of zooming out, or ‘tuning out’, and how perspective can help reduce anxiety during periods of volatility (for investors and All Blacks fans alike).
I have no doubt the All Blacks are toiling away and building as best they can for their upcoming tests, and next year’s world cup. Will they succeed, and secure the Bledisloe Cup for a 20th consecutive year? Will they take out the Rugby World Cup for the 4th time next year? I am hopeful, but I really don’t know at this stage.
These questions prompted the engineer in me to look back over the historical performance of the All Blacks to see how far recent performance had drifted – the answer unfortunately is ‘quite some way’ – Below is the All Black’s win/loss record over time.
All Blacks Test Match Win/Loss Ratio (1903 to 28/08/2022)
As the casual spectator would appreciate, for the past year the All Blacks have definitely not been at their best, tracking well below their historical win/loss record. I appreciate past performance does not tell us about the future, but if you zoom out, looking past our current 5th place international ranking, and focus on the all-time win/loss ratio of 76.70%, the All Blacks have been the best international rugby team hands down for a long time (South Africa and England trail a distant 2nd and 3rd with 62.69% and 55.92% win/loss ratios respectively.
The point I want to make based on the above data is that if you were to pick at random and watch any of the 3 games played in the last month, there is a 66% chance of the All Blacks losing – a depressing watch. However if you were to ‘zoom out’ and randomly pick a game to watch from the past 3 years or more, the chance of watching a losing game would be less than 33%!
Nasim Taleb’s Fooled by Randomness touches on this ‘zooming out’ concept in the investment world. Taleb provides the example of a spectacular investor who on average expects (over many years) to achieve a 15% return per annum, but that return doesn’t come every year, it is subject to 10% annual volatility. Like the All Black’s track record, a 15% return in any one year is impressive, BUT with 10% annual volatility there is still a (small) chance of losing money in any one year (a 7% chance to be exact). What is astonishing is how quickly the chance of losing money increases when you look at the investors performance over shorter time horizons. The below table shows that if you look at the performance of this highly skilled investor as frequently as daily their win/loss ratio would almost resemble that of flipping a coin at 54%… but when you zoom out, this daily hit rate translates to a 93% chance of having a positive return each year! (for the maths behind this click here).
Source: Fooled by Randomness (Taleb, 2001)
The more statistically minded of you may highlight that comparing one off performances of the All Blacks and average returns of markets is imperfect, but my point remains:
When it comes to your KiwiSaver or Investments, the greater the time between observations, the greater the likelihood that you see an outcome which is positive.
The below graphic from Brian Feroldi does a great job of depicting this conceptually.
This concept of less frequent observations of price or performance is one of the reasons Kiwi’s (and our banks) love property as an asset class. But the less frequent observation doesn’t come from ‘zooming out’, it is more a case of ‘missing data’ as in we just don’t see the value of any one home or property bouncing around day by day. We realise the real price of a property on sale or purchase which may be years or decades apart. This gap in data makes it a lot easier to easier for the average homeowner to tune out and stick with their 30-year plan to pay off their mortgage.
Jon Luskin penned a great article earlier this year that touches on this concept of acknowledging missing data when assessing investments. I agree with Jon’s idea that investors should not blindly favour alternative investments that look great because of missing data. But, I must flag there is a big difference between not being able to see a fair value, vs not checking your returns day by day. To make his point about missing data hiding the real world, Jon uses the return of the US stock market (S&P 500) through the COVID pandemic, and omits only 5 months of data… His point? It looks like such a smooth ride.
In reality, the missing 5 months of data accounts for one of the fastest and most brutal stock market sell-offs in history. Sadly, the -33% fall in the S&P 500 in March/April 2020 coincided with 41,148 Kiwis ‘taking action’ and moving their KiwiSaver accounts to a lower risk fund (PWC, 2021). Even more depressing, 90% of those that ‘took action’ (reducing their risk) remained in a lower risk fund 6 months after the sell-off (PWC, 2021) – Meaning a group of Kiwis roughly equivalent to the population of Timaru and Oamaru combined locked in a potentially sizeable loss.
Unfortunately technology now makes it particularly difficult to ‘tune out’ or ‘zoom out’. The devices in our pockets ensure that we almost never have a data gap, meaning we can check in on the performance of our KiwiSaver, investments, or share portfolios on daily (or even minute by minute) frequency. While live data or reporting may appear convenient, taking advantage of this level of connectivity is often a bad idea, exposing you to more noise than signal – To really hammer home this point, please watch the below video, it shows the roller coaster journey that was the first 125 years of the Dow Jones Industrial Average (a US stock index). While watching, please ask yourself the following questions:
- If I watched my wealth bounce around like this day by day, could I stay the course?
- Would ‘tuning out’ or ‘zooming out’ help me stick to my plan and remain invested?
- How would I feel if I managed to stay the course through the entire 125 Dow Jones journey?
As your advisers, it is our job to be intimately aware of the daily, weekly or monthly performance of your markets and portfolios – We need to ensure fund managers are acting and managing funds prudently. It is also our job to help dial down the noise for you, so you can focus on your plan, and stay the course.
So, the question is – ‘do you tune in, or tune out?’
I do encourage you to tune in and support your sports team (All Blacks or other)
BUT, when it comes to your KiwiSaver or investments I challenge you to know your plan, and ‘tune out’ a little I.e. check in on your investments less frequently. This should make it easier to look through periods of volatility, help you stay the course, and reduce your anxiety.
If you do get caught out, remember we are here to help – You can book a time with any of our advisers through the below booking links.
If you got this far, thank you for taking the time to ‘tune in’… Here’s hoping the All Blacks can replicate their most recent performance against Australia!