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Investment lessons from Leicester City
LEICESTER City's English Premiership title win earlier this month is more than just about the impossible triumph of the underdog, more than just about defeating 5,000-to-one odds, more than just about beating the Premiership's more money-laden clubs; it's about - believe it or not - the value of defeating the behavioural bias of loss aversion.
Schroders, in its latest Retirement Insights, looks at three key factors that led to Leicester's triumph, and what investors can learn from it.
For the non-footy fans, Leicester are an English football club that beat all odds and expectations to be crowned the 2015/16 champions of the most-watched football league in the world. Their previous highest league position was a runners-up spot in 1929, and they have been relegated or promoted 22 times in all.
As football journalist Richard Jolly put it: Leicester are not just the most improbable champions in the 128-year history of English football's top flight; no such underdogs have ever won a comparable division.
So, what can investors glean from the club's winning ways?
Stuart Podmore, Investment Propositions director at Schroders, says: "Perhaps more admirable than winning the Premier League while defeating those wealthier, stronger clubs, is the stark fact that in spite of the temptation to limit their play and consolidate their gains, Leicester collectively defeated the behavioural bias of loss aversion."
He said it was the equivalent of avoiding investors' temptation to lock in gains too soon and become overly protective, or their counter-productive desire to avoid losses at all costs without understanding risk as manifested by volatility.
Starting with Leicester's manager, Claudio Ranieri, Schroders looked at how predictable unpredictability was a key factor in the club's win.
"This is (Ranieri's) first top-flight title as a manager in his 28-year career and many pundits predicted he would be a failure at Leicester. Those pundits forgot that the world is unpredictable.
"Markets and economies ebb and flow, and are often at the mercy of sentiment. We believe that the price you pay, more than the growth you get, is the biggest driver of future returns," Mr Podmore said.
Then, there is the matter of value seeking and anchoring. Leicester are known for their lack of financial might and big-name signings - in stark contrast to many other top-flight clubs, notably Manchester City, Manchester United and Chelsea.
As Mr Podmore points out: Leicester's entire squad costs less than one of the players at Manchester City. And, Leicester's most-used starting 11 players cost £23 million (S$45.5 million), whereas Chelsea's most-used starting 11 cost £200 million.
"It's fair to say that most Premier League clubs are anchored to high prices and a cascade of rising prices has created a herding effect.
"When a relevant value (an anchor) is available, people make estimates by starting from that value and adjusting to yield the final answer. Investors, like football clubs, often fail to adjust sufficiently from anchors, which impairs investment decisions. Leicester managed to seek out the value in non-league clubs and abroad. They weren't chasing the glamorous and expensive names that were over-analysed by the market."
From Mr Podmore's value perspective, investors should learn from this and also look for genuine, cheap names that deliver strong returns over time.
Third and lastly, investors should look at the high conviction and concentration of the Leicester squad.
"This is a smaller, more concentrated group of players, about whom (Ranieri) has great conviction. The low turnover in the squad represents value investing over time. We buy our stocks and play the long game.
"It's worth also mentioning that there is no space for misplaced egos in an unemotional appraisal of risk and return."
Ranieri is known for keeping his starting 11, game in, game out, and making few changes - an anomaly in an age when squad rotation happens frequently and consistently.
So, can one hope for repeated success by sticking to such strategies? Can Leicester repeat next year what many have hailed as a miracle of the modern sporting age?
One thing's for sure, it would be less of a miracle the second time round: Leicester's odds to win next year's Premier League have come in from 5,000-to-1 to 33-to-1.
Mr Podmore says: "If Leicester sticks to their long-term, tactical success with low squad turnover and an absence of fear, history might just repeat itself."