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How you can learn about basics of investing from test cricket techniques

Aug 25, 2014 by Dwaipayan Bose | 40 Downloaded

It is said that, cricket is our national pastime. While cricket is entertainment for us fans, for cricketers it is very serious business. While shorter versions of the game like one day international (ODI) or T20 is increasingly gaining more and more popularity amongst fans, for cricket pundits, test cricket is still the highest form of the game. The techniques and skills of cricketers are tested far more in the five day format than any other format of the game. While many of us watch test cricket for pure joy of the game, there are many lessons that we can learn from this glorious sport, as far as investing, especially equity investing, is concerned. In this blog we will discuss, how you can learn about basics of investing from test cricket techniques?

  • Risk Taking:

    With the preponderance of limited overs cricket like ODI and T20 in the cricketing calendar, there is a tendency of risk aversion among the bowlers. We have seen bowlers adopting increasingly defensive techniques like bowling a leg stump line with a packed leg side field or bowling full and wide outside the off stump. We see spinners pushing the ball faster through the air, instead of flighting the ball. From a defensive point of view, it is effective, since it cramps the batsman and does not allow him to free his hand to hit the ball. But in the longer version of the game, is it useful? No it is not. Bowling a leg stump line or full and wide outside the off stump can definitely prevent runs, but it also prevents the bowler from getting wickets. In test cricket, you have to get 20 wickets to win a match. Therefore to win a test match, you are better off as a bowler, attacking the batsman, with an aggressive field placing, even if you go for a few runs. At the end of the day, it is wickets which matter in test cricket. Similarly in investing, risk aversion will prevent you from achieving your financial goals in the long term. In fact, on a post tax basis you may not be even able to beat inflation if you are too risk averse. Investing for long term objectives is like test cricket. You have to take a few risks if you want to achieve your goals. Though equities is riskier compared to other asset classes, it gives you the highest return in the long term. So, even though you may be exposed to volatilities in the short term with equity investing, you will stand to gain in the long term, as far as your long term financial objectives are concerned.

  • Disciplined Approach:

    More than any other version of the game, a disciplined approach is critical to success in test cricket. Unlike shorter formats of cricket, there are fifteen sessions in test cricket. To win a match you have to perform well in most sessions. Performing very well in one or two sessions is not enough. That is a why disciplined approach is very important in test cricket. We saw what lack of discipline can do to the fortunes of a side, in the recently concluded five test India England series. A successful side needs to be disciplined in all the three departments of cricket, batting, bowling and fielding. Like test cricket, equity investing is also a long term engagement. Therefore, a disciplined approach is very important in equity investing as well. You need to be disciplined in savings and investing. Systematic investment plans (SIPs) help you stay disciplined in achieving your long term financial goals. SIPs will ensure that you save enough on a monthly basis and transfer the savings to investments, to enable you to benefit from the power of compounded returns to meet your long term financial goals. The other important point about disciplined investing is patience. Patience or in cricketing terms, temperament, is one of the most important attributes of a test batsman. How many Indian batsman did we see get out, chasing the ball outside the off stump, in the recently concluded series. On the other hand, how many times did you see a great test batsman like Rahul Dravid get out, chasing a ball outside the off stump? Patience is the key in test cricket, just like it is in investing. Whether the market goes up or down by 10%, you should not be bothered. You should have an investment plan and stick to it, to meet your long term financial objectives.

  • Asset allocation:

    A balanced side is one of the most important success factors of a test team, as we painfully learned from this series defeat to England. Unlike an ODI or T20 match, one or two players cannot win you a match. The assets of a cricket team are the batsmen, bowlers and fielders. The composition of a test team should depend on the conditions. On very strong flat batting wickets, like the ones we have in India, you should have batting strength in your side. On turning tracks, you need to have enough depth in your spin department. On green seaming or bouncy wickets, you need to have fast bowlers who can do the job for you. Therefore, the balance of the side is very important. If you fill your bowling unit with fast bowlers on a slow turning track, basically it is a gift for the batsman of your opposing team. On the other hand, if you have slower bowlers on a fast track, you basically are gifting away runs to the other side. Similarly in investing, asset allocation is crucial in meeting your financial goals. If you are young with high risk tolerance, your asset allocation should be weighted to equities. On the other hand, if you are retired with low risk tolerance, your asset allocation should be weighted to fixed income. Please refer to our article, Asset Allocation strategies for different age groups. Asset allocation is the most important aspect of financial planning. A lot of investors allocate a sub-optimal proportion of their portfolio to equities. This is because the risk appetite of investors in India is low. Asset allocation for investors depends on a number of factors. These are as follows:-

    • Income and Expenses of the investor

    • Liquid (cash savings) of the investor

    • Short term financial goals

    • Long term financial goals

    • Insurance cover (both life insurance and health insurance) of the investor

  • Monitor your performance:

    The role of the captain in cricket is very important. The captain has to make decisions, with regards to the various units of the team and the strategy the team has to adopt. Among the most important decisions, the captain has to make, are bowling and fielding changes. Similarly the captain has to make fielding changes in line with the bowling attack or the situation in the match. It is a dynamic process. If a bowler is not getting wickets, then the captain has to replace him with another bowler, who he thinks can get wickets. If the captain fails to make these changes at the right time, then he gives the upper hand to the opposing team. Form of a cricketer is not a constant. The captain usually entrusts bowling responsibilities to his most in form bowler. But there may be situations, for a variety of factors, where the most in form bowler or bowlers cannot get wickets. The captain then has to try other bowlers, depending on how they have performed. The same applies to batting as well. Sometimes the one down or two down batsmen, like Cheteshwar Pujara or Virat Kohli, may be out of form for various reasons. The captain then, has to re-shuffle the batting order or even change the batting line-up. It is the same with investing. Investors should monitor the performance of their investment on regular and continuous basis, and rebalance or readjust their portfolio to maximize their returns over the investment horizon. If a mutual fund in the investor’s portfolio is underperforming over a certain period of time, then he or she should switch to a better performing scheme. Just like you do not drop a batsman or a bowler who has not performed in one match, investor should not also switch from a fund that has underperformed for 6 to 12 months. Investors should monitor their investments for a sufficiently long period of time, and then make a decision to churn their portfolio if required. What is a sufficiently long period of time? It depends on the market conditions and the investment horizon.

  • Expertise is important:

    Technique is more important in test cricket, than in any other version of the game, like ODI or T20. The so called superstars of ODI and T20 had their technique or rather the lack of it, thoroughly exposed in the recently concluded test series between India and England. Whether it is the front foot technique on a green seaming wicket or the back foot technique on a fast bouncy wicket, technique is very important. Where does technique come from? Technique comes from training and experience. Some people say that, one should rely on instinct. Very often instinct works very well on placid tracks, like the ones in the sub-continent, where you can play shots without having to move your feet. But these same batsmen fall woefully short on fast and seaming wickets. The great test batsmen like Sachin Tendulkar or Rahul Dravid had fantastic techniques, when it came to any kind of bowling attack or track conditions. Similarly, technique or expertise is very important in investing. How do you know, whether a stock will do well over your investment horizon? Unless you are an expert, with sufficient knowledge about stock markets, there is no way you can know with any degree of confidence, whether a stock will give you good returns or not. Fortunately for you, the mutual fund managers have the expertise and the right techniques, to select stocks in a mutual fund portfolio that can give good returns over your investment horizon. Just like the flat track bullies we have here in Indian cricket you can get great returns by investing in a selection of stocks in a roaring bull market. But does it really mean that, you are an expert equity investor. A good mutual fund, on the other hand, gives excellent returns over both bull market and bear market cycles. Therefore, unless you are an expert stock picker, mutual fund is always the best equity investment option for you. How to select a good mutual fund? That requires expertise too. You should consult a good financial advisor to help you select the right mutual fund that can help you meet your financial objectives.

Conclusion

In this article, we have discussed similarities between equity investing and test cricket. There are several investing lessons that we can learn about basics of investing from test cricket techniques. If we apply these lessons wisely, there is no doubt that we can be successful in our investing objectives. Wishing the Indian team good luck in the upcoming series against West Indies and Australia, and may equity investors in India enjoy even more success.

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Dwaipayan Bose

An alumnus of IIM Ahmedabad, Dwaipayan is a Finance and Consulting professional, with 13 years of management experience, mostly in MNCs like American Express and Ameriprise Financial, both in India and the US. In his last role, he was the Chief Financial Officer of American Express Global Business Services in India. His key interests are building best in class organizations, corporate governance and talent development

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