Investment lessons from the Soccer World Cup

13 December 2022

I love a great underdog story. You know – David vs Goliath, Rocky Balboa vs Apollo Creed. In this year’s Soccer World Cup, there have been a number of upsets and giant killers. In the opening week, Saudi Arabia defeated Argentina, despite Messi opening the scoring. Another unexpected outcome was Japan taking Germany and Spain to the sword – both former World Cup Champions. But for me, the real surprise package of this tournament has been Morocco. The Atlas Lions beat World No 2, Belgium and now head to a thrilling quarter final tie with Portugal after beating Spain on penalties. The team has stifled the opposition with resilient defensive displays, so much so that no opposition player has scored against them so far in open play.

In the world of investments, playing defence this year has been so far, the winning strategy. Offshore cash has yielded close to 7% simply due to the sharp depreciation of the rand. Perhaps the biggest surprise has been the concurrent sell-off of global bonds, down 17% in dollar terms year to date, and of global equities, down 16% in dollars. And the underdog story must be the positive returns from the JSE with equities up over 5% and SA cash up delivering close to 5%. While South African equities have not been able to beat inflation, performance has been more resilient than most would have predicted given our recurring issues with load shedding and the more recent Phala Phala own goal.

Soccer teams are better informed and scientific in tactics. This approach to team selection and tactics was in fact popularised in Michael Lewis’s book “Moneyball: The Art of Winning an Unfair Game”, which describes how the Oakland Athletics Baseball team used statistics to compete effectively with a much smaller budget. Back to Soccer, it has been noticeable that in four successive world cups, teams have had fewer opportunities to score, meaning that to win, teams have had to become more effective in taking their chances in front of the goal. This is similar to having a shrinking JSE and a smaller set of mispriced opportunities due to the market being dominated by large, well-research companies. A reduced opportunity set also reduces the alpha-generating opportunities, forcing investment teams to sharpen their pencils to avoid making mistakes.

Teams at the World Cup are now also playing more defensively. Back passes to the goalkeeper have increased by over 60% from the previous world cup. This would be equivalent to your fund manager keeping more cash in the fund and waiting patiently for opportunities in the market. Increased volatility and economic uncertainty have led to a more cautious approach to investing.

Some of the surprise teams of the tournament such as Morocco, Portugal, USA and Japan have also the distinction of having covered more ground than other teams. The Moroccan team has for instance, on average, run 15 more kilometres per game than the Argentinian team. This reminds me of the breadth and depth of research efforts in investment teams. In order to uncover mispriced opportunities, it is important to look deep into the mid- and small-cap space or have the capability to evaluate unlisted credit in South Africa. It is also key to have a strong bench in order to rotate the squad. The favourites, Brazil, have already given playing time to every one of the squad members, including their third-choice goalkeeper Waverton, who came on as a substitute against South Korea.

Qatar, the unfancied host of this year’s Soccer World Cup, spent almost $220 billion on its infrastructure to host one of the most viewed sporting events in the world, with FIFA expecting 5 billion fans globally to watch the tournament. As the smallest nation to host a World Cup, Qatar spent 18 times more than Russia to build six new stadiums, rail infrastructure and a brand new city with some 45 000 hotel rooms to host visitors. The country expects dividends from tourism to provide a return of at least 10% on their investment, with the expected growth multipliers over the long term, emulating the success of Dubai.

However, all this investment did not reap any success in the field of play. Qatar became the first host in World Cup history to lose their opening game against Ecuador. The team lost all three of their group games, not even earning a single point. Qatar, at least, managed to score one goal – which is more than Trinidad and Tobago, China or DR Congo can say – with these three not even scoring a single goal in past finals. The Qatar of the world of investments this year has undoubtedly been Bitcoin. The ultimate speculative punt is down 65% year to date and the recent collapse of FTX, a crypto platform, has become the latest high-profile casualty of the $2 Trillion crypto winter.

One of the lessons of this Soccer World Cup has been that not conceding also means that you won’t lose a game. In investments, the same rule applies. Don’t lose money. Permanent loss of capital occurs when you buy speculative assets or overpay for assets.  In downcycles, it makes sense to play defence and focus on cash generative assets, where one gets rewarded from predictable cash flows rather than price appreciation. That said, when the time is right, deploying one’s strikers to score goals is what will win you the game. But the road to the final is long and arduous, and patience and resilience – just like in investments – are required to finally lift the World Cup on the 18^th of December.