“Do you believe in Miracles?”
Al Michaels famously asked this question following the USA men’s hockey victory over the USSR in the 1980 Winter Olympics. As one of the greatest sports upsets of all time it quickly became known as the “miracle on ice”.
Looking at the stats of the game Team USA should not have won.
The Soviets had won all 12 previous matches against Team USA by a combined score of 117-26.
How did they do it? Team USA pulled off one of the greatest upsets in sports because they cultivated luck.
If you are the favorite, simplify the game. If you are the underdog, make it more complicated. – from The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael Mauboussin
If you’re the underdog you don’t want to play the game straight up. That’s the way the favorite wants to play. They’re bigger, stronger, faster, and more skilled than you. They want to play to their strengths and dominate you. But if you’re the underdog you need to change the game up.
Every game is a combination of skill and luck. One bounce of the ball. One call by the refs. One gust of wind at the right time can change the outcome of the game. When the underdog complicates the game, they create more opportunities for luck to intercede on their side.
How Team USA Cultivated Luck
Team USA “complicated” the game in two ways. The Soviets played a fast-attacking style relying on their speed. Team USA countered by keeping more players back on the defensive end taking away the fast break. The second way Team USA cultivated luck was with their goalie play. Team USA used goalies that employed the new Butterfly technique. A technique the Soviets were not used to playing against and had trouble scoring against.
The Soviets wanted to keep the game simple and dominate. But Team USA shifted the game from one that favored the Soviets to one of open possibilities. Team USA brought luck onto their side and pulled off one of the greatest upsets in sports history.
Be the Soviets of Investing
When thinking about investing a sense of national pride makes us want to be Team USA. The plucky upstart investor that defies all odds and picks that next Apple before it becomes Apple leading to untold riches. Or we make a lucky macroeconomic call that we ride to fame, fortune, and the CNBC title of “Prophet”.
Instead, we should be like the Soviet hockey team. We need to simplify the game, play to our strengths, and put the odds in our favor.
No Excessive Trading
The first thing we need to do is to reduce unnecessary trading. Excessive trading generally leads to subpar returns over the long-term. One trade requires making 2 correct decisions. When to buy and when to sell. Even if we make the right trade decision 70% of the time, the odds drop down to 49% that we can make two correct decisions in a row. The lower our successful decision-making rate, the lower the probability we can make two correct decisions in a row. And then multiply that over many trades and many years and you can see how it leads to below-average returns.
Play the Odds
Second, we don’t know the future, but the stock market tends to rise over time. The chart below is from an Urban Carmel’s tweet.
Starting at any day since 1990, the S&P 500 is positive one year later 79% of the time with a median return over 10%.
And this table from Ben Carlson is a few years old but it shows the percentage chance of having a positive total return given a specific rolling time period?
We want to invest with the odds in our favor. That means being as fully invested as possible in the AMM Dividend Growth strategy over a long period of time. There will be periods when our cash is higher than we want while looking for our next investment. But our cash position is never a market call.
Finally, we want to invest in high-quality companies. The “quality” factor is a consistent factor for generating strong long-term returns.
Lawrence Hamtil posted this chart to Twitter highlighting the performance of the quality factor for the past 34 years.
The MSCI quality index focuses on high return on equity (ROE), stable earnings, and low leverage. We tend to focus more on return on invested capital. But will switch to ROE for financial companies.
Ultimately, we want to shrink our investment universe down to companies with one or more of the high-quality characteristics listed above. Then shrink it further by only selecting the companies that pay a dividend. It doesn’t guarantee all our choices will be good, but it gives us the best odds of protecting capital and building high-quality growing income streams.
We don’t need to complicate the investment game. We can do a lot of simple things to increase our odds of success