Investment Lessons from Yuvraj Singh’s T20 Innings

On Sunday, I watched the third T20I between India and Australia. Chasing a stiff target of 198 runs, India seemed on course until the third wicket fell. The next batsman Yuvraj Singh, was making a comeback to the national team. In the initial part of his innings, Yuvraj struggled, scoring just five runs in nine balls. As the required run-rate rose, the buzz on social media and the views of television commentators weren’t particularly charitable.

Then something interesting happened with India needing 17 runs to win in the last over. 11 runs were scored from the first three deliveries which Yuvraj faced – including a four and a six – putting the run chase back on track. With India winning the match, Yuvraj was hailed as a 'hero' all over.   

To my mind, the reaction was a classic case of circular logic; in other words, the result was used to selectively determine the cause. I have no doubt that had India lost, the focus would have been on the first half of Yuvraj’s inning wherein he struggled; furthermore, he would have been painted as the villain of the piece. However a win meant that the focus shifted to his impressive performance in the last over.  

Now let’s draw a parallel with the world of investments. Investors often rely solely on the performance to draw an inference about an investment avenue’s worthiness. For instance, if a mutual fund clocks a strong showing, investors infer that the portfolio manager must be skilled, the investment process must be robust, and so on. However such ‘analysis’ is fundamentally flawed. 

To begin with, in a rational approach, one or more causes lead to a given result, and not vice versa. Also, the performance-based approach fails to separate luck from skill. Consider, a mediocre fund helmed by an incompetent portfolio manager who got lucky with his stock picks. On account of the positive performance, the manager will be considered to be skilled. Likewise, a skilled manager whose investment style is currently out of favour will be given the thumbs-down on account of a poor showing. Investors’ woes will be further worsened if they choose to focus on near-term performance in an asset class like equity. 

A prudent approach would be to identify and evaluate factors that will influence performance. The results of this evaluation must then be compared with the fund’s long-term performance. If the two are in sync, then the analysis can be considered to be accurate.

Market-linked investing is inherently risky. Investors who base their decisions on performance, further accentuate the risk borne. While adopting this approach in cricket-related matters is harmless, doing so while investing could be a recipe for undesirable results.

Of Sangakkara, Yuvraj, and Prashant Jain…

In the recent World T20 final, southpaw Kumar Sangakkara’s blistering knock helped Sri Lanka triumph over India. Playing his last international T20 match, Sangakkara had had a rather indifferent run coming into the final. But on the day, his batting display meant that all skepticism surrounding him vanished and the clichéd maxim “form is temporary, class is permanent” was back in circulation.

In the same match, another southpaw Yuvraj Singh had a bad day at the office. To put it mildly, he was woefully out of sorts with the bat. As a result, he found himself at the receiving end of a barrage of criticism; even as I write this post, critics are busy writing his cricketing career’s obituaries. Though Yuvraj has proven credentials as a match winner, not many seem willing to offer the “form is temporary …” defense in his favour, at present.

To my mind, the diverse reactions can be attributed to a recency bias. The accolades for Sangakkara and criticism for Yuvraj have more to do with their performance in the final match, rather than an accurate evaluation of their cricketing prowess. Both Sangakkara and Yuvraj are unquestionably talented batsmen with impressive careers to show for. But for now, most believe that Yuvraj is a 'has-been', while Sangakkara is a 'class act'. And what’s driving this belief—the players’ showing in the most recent match.

The recency bias can manifest itself in investments as well. If markets have been on an upswing in the recent past, investors are more likely to believe that they will continue to move northwards going forward as well, rather than otherwise. Likewise, a stock or sector which has hit a purple patch lately will often inspire more confidence in investors rather than one that has underperformed recently.

O Prashant, Where Art Thou?

In the latter part of 2013, I was addressing a gathering of mutual fund distributors, advisors and investors. Things became interesting when the conversation veered towards funds run by portfolio manager Prashant Jain i.e. HDFC Top 200 and HDFC Equity. To clarify, I thought (and continue to think) highly of those funds and the manager in question. But then, I was in a minority. The funds were having a terrible run in 2013, underperforming both their respective benchmark indices and comparable peers. The audience was at its vitriolic best: Theories such as the manager doesn’t churn the portfolios enough, the funds are too large to perform, and the manager is a spent-force were put forth by the audience to rationalise the underperformance.

Prashant Ahoy!

Oddly, at present (i.e. roughly six months later), Jain and his funds are being eulogized by the same set of distributors, advisors and investors. And what has changed between then and now–the funds have clocked a strong showing and emerged among the best performers in a peer-relative sense. Is that surprising? Not really. Broadly speaking, the manager has been betting on a turnaround for a while now and had positioned his portfolios accordingly. Expectedly, while the funds struggled for a better part of 2013, they staged a comeback of sorts in the present market upturn.

Is it Heads or Tails?

Here’s what makes the funds tick: Jain easily ranks among the best portfolio managers in the country; he plies a robust investment process and is backed by a fund house which has a reputation for safeguarding investors’ interests.

The aforementioned factors existed when the funds were underperforming, and they continue to be present now too, when the funds are outperforming. All things being equal, a year or so of underperformance doesn’t turn a good fund into an inferior one; likewise, outperformance over a six-month period doesn’t convert a mediocre fund into a superior fund.

Yet, we have seen the manager and his funds go from vilification to glorification in a six-month period. This is irrational behavior at its best which can be attributed to the recency bias. I shudder to think of the reactions that will follow, if Jain’s funds were to underperform over the ensuing six months.      

What investors must do

Resist succumbing to the recency bias while investing. Think about it: you might exit a sound investment avenue with solid long-term prospects because of short-term underperformance. Conversely, by blindly chasing an investment which has fared well you may run the risk of making an overpriced buy or even one that is unsuitable for you. Maintain a long-term orientation while investing; it will help you block out all the noise which prevails in the near-term.

Also, learn to look beyond just performance while making investment decisions. Rather focus on what makes the investment avenue tick to better understand when it is likely to fare well and otherwise. This in turn will help you make informed investment decisions, independent of recent performance.

On a lighter note, a word of caution for those writing off Yuvraj based on one poor showing—the humble pie isn’t particularly palatable!