SubscriberWrites: Cricket and investing have similarities. One can teach about the other

Thank you dear subscribers, we are overwhelmed with your response.

The differences first

1. The multiplicative versus the additive – this is key and its implications

The key and most important difference between cricket and investing is – by nature, cricket is additive in scores while the scores in investing are multiplicative. 

In practical terms, once a batsman piles up 10,000 runs, his accumulated score cannot fall below 10,000, irrespective of what he does in the next innings. While if an investor puts Rs 10,000 to work, it can go to Rs 8000 if he ends up with a -20% return on investment that year. This is what is essentially the difference between additive vs the multiplicative behaviour/nature. Cricket is always additive and investing is always multiplicative. And because it is multiplicative, till you have completed your investing career, you cannot be sure of what is your final score. In investing just adding the annual end up giving you erroneous results. 

Being an important point, a couple of illustrations are in place.

Illustration A: Let us assume an investor earns up 30%, 40%, 50% and -100% on successive investments made one after an another and assuming all money in a single investment at any particular point in time. The net effect is that his capital gets fully wiped out after the -100% return and he reaches zero capital even after the passage of time. The simple or additive return in this case is works out to 5%. 

{ (1+30%)*(1+40%)*(1+50%)*(1-100%)-1  = 0 or 0% return}

Illustration B: If you want to take a less extreme example – an investor earns a return of say 20%, 20%, 20%, -50% over 4 different investments, the net compounded return is -14% (even though the simple average of the returns is positive at +2.5%!!!)

{ (1+20%)*(1+20%)*(1+20%)*(1-50%)-1  gives -0.86 or -14% return}

Illustration C:  Another example should settle the matter – an investor earns a return of say 10%, -10%, 20%, -20% over 4 different investments, the net compounded return works out to -5% (even though the simple average of the returns is 0%!!!)

{ (1+10%)*(1-10%)*(1+20%)*(1-20%)-1  = -0.95 or -5% return}

Just adding of percentages in investing gives very different results from compounding – a difference that is underappreciated but material as seen in the above illustrations.

2. In investing you can choose to leave any ball

The one key difference which is skewed in favour of investing is – there is no compulsion to play every ball. You can leave just about any ball at choice. In cricket, if the ball is on the wicket, you just can’t leave it. However, in investing leaving a stock that then goes on to do very well can be as troubling and can give you that very nagging “missed out” feeling.

3. Umpiring – No DRS in investing

In investing, the market is the only umpire. There is no DRS (decision review system) – you can’t go and appeal higher!!! However, the market umpire can keep changing its mind on a stock from time to time and there is nothing absolute about its decision. There are score of examples where one day hero next day zero. And vice versa too.

The similarities

1. Be positioned for the slog overs

In investing, the slog overs are akin to the months of a ripe bull market. You got to be positioned well in both – cricket and investing. Just like in cricket, you need to big hitters around the slog overs, in investing you should be reasonably fully invested and ensure that you don’t hold too much low beta (low risk) lest you miss out on the run-away market. You could do with less debt (Dravid) and more equity (Sehwag).

2. Read the wicket and position your portfolio accordingly

The Sydney vs Perth comparison is just apt. If you have a Marshall, a Garner and a Holding in your squad, the type of pitch or conditions hardly matter – but when you have fast bowlers who are lesser mortals, you can load up on your pacers and drop your spinners when you play at Perth – the fastest wicket in the world.

But if you are playing on spinning tracks like Sydney/Motera, then you play all four- Prasanna, Venkat, Bedi and Chandra. 

In investing, if you are able to sense the type of market that is likely to play out, then you have a wonderful chance of positioning your portfolio to derive best results. This however, is easier said than done. 

Investing and cricket are one of the most fascinating journeys one can make and they have truly captivating similarities and tangible  differences. For those who can marry the two there lies even more of these.