Cricket’s lessons for investors: The importance of choosing the right approach
The article draws parallels between different formats of cricket and investment/trading strategies, emphasizing the distinction in approaches, objectives, and timeframes between Test, ODI, T20 cricket, and investing versus trading.
It is cricket season. Have you wondered the most original form of cricket has always been test cricket which is a display of skill and tenacity. It has always been about survivorship and those who survive, live to score and if you have scored enough, you improve your chances of a win. Since survival is more important than scoring batsmen would take fewer risks and they would evaluate runs per unit risk you take while selecting a shot. Hence orthodox shots and copybook batting are what one would expect here.
ODI is a shorter version of the game which earlier used to be 60 overs a side and then became 50 overs. Viewers got an outcome within the same day and given the shorter time, one could strike a balance between survival i.e. playing the full 50 overs without getting all out and also putting a decent score on the board. Then came the version of T20 which further shortened the game with 20 overs a side. Batsmen were no longer afraid of survival. Lasting 20 overs was less of a challenge but scoring well in each ball was the only objective. Techniques mattered less. Unconventional batting took over orthodox and we saw various innovations like switch hit and so on.
Take any sport/game which has multiple formats. Let's say marathoners vs sprinters: they are built very differently, train differently, eat differently. One is about a short sprint at peak speed while the other is about a long run at a consistent pace without causing any self-injury. Sprinters are more muscular while marathoners are lean. Both run, but their objectives are different and timelines are very different. Take chess for instance where the classical format would have long hours of 1 single game while rapid or bullet would test the same skills with a tight time constraint. The vectors change and the game changes dramatically.
Investing and trading are what test and T20 are to cricket. One is a true test of skill and the other is a test of accuracy. If you have time on your side, you can afford to be inaccurate in the short run but it can be costly if you don’t. Hit out or get out is the objective in T20. In trading parlance, there will be tight stop losses, where if the stock falls, you take your losses and move on. Time is indeed money in trading.
Trading focuses more on price movements in the short term while investing focuses on value movement. One needs to know which game you are playing. Value moves very slowly as results are published only quarterly but valuation keeps moving up and down by the second depending on how the price moves.
We often end up mixing our portfolio and what starts off as investing, quickly becomes trading or vice versa. As they say, long-term investment is a short-term trade gone wrong! This is not to glamourise which format of the game is better. Important to know, where our strength lies and whether we can do it well. Trading would be driven by several factors like global market cues, market fundamentals, inflows/outflows, news flows, technicals etc and to fathom all this and get a trade right requires a different skill set. Conversely, investing would require due diligence on the sector, company, management, valuation, governance etc and then choosing whether to invest or not.
The timelines are different and so are the approaches. In simple words, it is stress per unit of return generated by your portfolio. One needs to decide whether or not they can live with it. Like in a test match, the batsmen would seldom hit an uppercut as the risk-reward may not be in his favour but in T20 it is par for the course.
Stress comes from the shot we choose. Shot is chosen based on the need for scoring. Need for scoring comes from the situation of the match whether to score or protect wickets and that need comes from the time we have at hand. Time comes from the game we play. Choose your game well.
Anand Vardarajan, Business Head – Banking, Institutional Clients, Alternate Products and Product Strategy, Tata Asset Management.
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First Published:11 Dec 2023, 03:11 PM IST
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