Like many South Africans, I’m a passionate rugby fan – I like to play, watch and talk about the game with friends. In the last five years, that passion has seen me become engrossed with the seriously-addictive Superbru prediction game. The rules of the game are simple: participants aim to predict the winning team – and margin – for each match. I’ve always been an average player, until last season when I decided to do one thing differently. I employed a well-known investment strategy that I routinely use in my position as a quantitative analyst for a large multi-management company to play.
The similarities between a prediction game like Superbru and the management of investments are interesting. Both are dominated by active players who need to make decisions trying to predict the next winning team or winning investment. These participants base their decisions on imperfect information and are susceptible to biases in their decision-making. In the real world, there’s a shortage of consistently-brilliant coaches, and the same can be said of asset managers. Research shows that most active asset managers in the US struggle to outperform a comparable benchmark index over the medium to long term. Does that mean there is no way to beat the law of averages? Not necessarily. Just as in team selection, you need to choose your unit trusts carefully and with the right kind of planning.
One way my employer minimises some of the randomness of choice while managing costs at the same time, is through index tracking or what is termed ‘passive’ investing. This means picking a strategy based on sound principles – one that could be expected to ‘win’ over the long term – and then sticking with it through the ups and downs. This kind of tracking strategy is successful for two reasons: the costs associated with implementing the passive approach are much lower; and it cuts down on the risk of subjectivity creeping into the decision-making process.
I wondered if the strategies we use at Sygnia could be applied to a prediction game like Superbru. I decided to test it.
I had come across a potential winning strategy in a couple of books about sport, behavioural economics and the effect of big data: ‘Why England Lose: And Other Curious Football Phenomena Explained’ by Simon Kuper and Stefan Szymanski, and ‘Scorecasting’ by Tobias Moskowitz and Jon Wertheim. Both proposed (for different reasons) that the home team, regardless of the sport, wins a disproportionate amount of the time.
This theory gave me the basis for designing a low-cost strategy that had been shown to ‘win’ in the long term. The ‘home team’ insight was my ‘index’ which I aimed to capitalise on passively. Now all I needed was to fine-tune it by finding a specific formula to apply. After a bit of number-crunching and testing my theory on previous results, I had it: I expected the home team in Super Rugby to win by a narrow margin. I settled on a 6-point differential to maximise the potential upside, based on the scoring system of Superbru.
Was it a recipe for success?
The proof is always in the statistical pudding…
At the end of the 2014 Super Rugby season, out of a total pool of nearly 200 000 players, I was placed 32nd. The average player had called 58% of the games right, whereas my simple formula had correctly predicted 72% of them. That might not make me an MVP, but it was a finishing position in the top 0.02% and a very satisfactory result.
If one were to take the principle behind this formula and implement it as an investment strategy, the odds are in your favour that you will earn solid returns on your investments and beat most other investors in the long run. If you need excitement, I suggest you focus your energies on predicting the next winning rugby team. For long-term investment success, stick to the basics. That’s the right game plan.
*Michael started his professional career with the Quantitative Analysis team at Sygnia just over 5 years’ ago after completing a BBusSc in Finance and Marketing at the University of Cape Town. He is a member of the Investment team, focussing on multi-managed institutional products and index tracking unit trusts.
The Sygnia Group comprises six operating companies; Sygnia Life, a life assurance company, Sygnia Asset Management, a licensed asset management company, Sygnia Collective Investments, a unit trust company, Sygnia Financial Services, a LISP, Sygnia Securities, an execution-only stockbroker and Sygnia Systems, a financial software development.