Diego Maradona, an icon of 1980s soccer, once remarked that football is always beautiful, there was no such thing as a boring game. He went onto elaborate that even in the most mundane of nil all draws there was surely something of interest to the viewer, whether that be a new rookie developing, an ageing player rolling back the years, the passion of the crowd, the tension of the coaches, the performance of an individual or the triumph of the collective taking the underdog level with a more famous opponent. Something somewhere would be of intrigue if you have the right mindset.
That logic has a natural capacity for extrapolation into so many other fields. Whether it be Economics, French cinema or Fijian Hip-Hop, if you enter into the histories, the rivalries, the stories of any arena of human endeavour there is a good chance you can become captivated by one or other elements.
We feel that way about the Australian equities market, investing in established domestic businesses, but perhaps we need to extend some effort into welcoming all our readers into viewing shares with the same affection. So let’s kick around with the notion that football can become a malleable analogy exploring the stock market, especially this year with so many eyes imminently turning to Russia for the latest instalment of the FIFA World Cup. Let us ask ourselves, what can football teach us about the market, and if the World Cup was an investment vehicle, how would you approach it?
So we have two seemingly disparate concepts, firstly the World Cup, a quadrennial soccer tournament with 32 international teams, secondly the ASX200, a domestic securities exchange with the largest listed businesses in Australia. The differences are manifest, so where at all are there any parallels? The first is their scale, both are multi-billion dollar phenomena and very few people will watch all 64 matches in Russia throughout June and July.
Likewise, not all investors will want to research and analyse every business on the ASX200. As such, there is a choice and with that comes preferences, some logical, some less so. Both have huge levels of interest but will always look to grow and spread their gospel into new households.
Both events create an emotional reaction which can spread onto the front pages of the media, whether it be triumph, disaster or scandal. Finally, the World Cup and the share market are broad, eclectic and heterogeneous arenas which defy lazy generalisation and are oft misunderstood. For the uninitiated, they can seem intimidating and niche, but for millions of people, they capture hundreds of hours of entertainment, stimulation and debate.
For all there flaws, they are also parties where everyone is invited, and with a strategy, a lot of fun, and even some money might flow your way. If you wanted to invest in a business, or back a certain team in this tournament, how would you filter through all the options?
With the stock market, a good place to start might be looking from the top of the pyramid down, using macroeconomic conditions and criteria such as interest rates, unemployment changes and fiscal policies to highlight specific sectors of the economy that you feel are likely to fare well. When it comes to the World Cup you can look at the qualifying regions that each team comes from in order to zone in on more likely winners than others.
For instance, no African team has ever won the World Cup, the same is true for Asian, Oceanic and Concacaf teams. Over time this could well change but history shows us the winners traditionally come from South America (Argentina, Brazil and Uruguay) and Europe. Furthermore, the host nation plays a significant role too, not since Sweden in 1956 has a South American team won in a European tournament. Given that Russia 2018 will be played predominantly west of the Urals there is every chance the winner will come from the Old World.
Within a top-down strategy, you might then narrow down further into basics, in the stock market you might want to identify the best businesses in a given sector (eg healthcare), in football the best teams from within the region (eg Europe). But what makes for a quality team or business? With football you would argue that historical data is helpful, what has the nations win/loss record been over the last five years or so? That helps you identify teams with a track record, it should help you prioritise a Germany over Poland.
With shares, you look at the price trends and can differentiate between the range bound, downward trending and growth stories to ascertain an idea of past performance. But the history books only tell us the past, what about the fundamental qualities of the underlying unit? With a business you can choose to filter certain metrics which are associated with success, these could be revenue growth, margin protection, level of debt and growth of the dividends. In Russia 2018 if you want to pick a team that might win it you’d probably look for pace in attack, experience in defence and strength in midfield.
Another stage of the analysis process might be to look at what the broader community values each entity at, be it a soccer team or an airline. Trying to estimate the intrinsic value of anything, be it a striker at Real Madrid or the loyalty programme at Qantas is a contentious issue prone to debate. One methodology might be to look at comparable sales amongst a peer group, for instance, maybe Messi is worth at least the same amount as Neymar given the latter’s $354m AUD transfer to PSG. Or you could argue a players value is the sum of the revenue that they will contribute towards in the future, with the amortisation of their contract a consideration.
Finally, you could argue a team or a business are as valuable as the sum of all their parts, including intangibles like experience, leadership or in a business concept brand awareness. Valuing anything is tough but luckily for the retail investor or the armchair soccer fan, you can find a number of independent valuations of businesses and players from which you could compile opinions towards a consensus view. In soccer you have websites, video games and forums creating hypothetical market valuations of players. If you then find the national squad with the highest total value of assets (players) then you have a further clue as to where quality might rest. When it comes to the stock these valuations can come from professional research analysts via broker calls and investment tools.
Finally, the beauty of both these multi-billion cases is that you get to choose how, when and how much you invest in each. With the World Cup, you might watch lots, have a few fun wagers or completely ignore it. The same can be true of securities, to millions of Australians they are a staple of their families assets, for others they a new experiment and for some more, they are a complete unknown.
But to finish where Maradona started I would argue that both are intrinsically fascinating and rewarding and give you a level of interest related to how much you are willing to invest in your own energy and resources. With business, we have a series in this publication which we think meet a range of criteria that make them quality in the long run and therefore undervalued today (General Advice). With the World Cup, the winner is likely to hail from Europe, have a degree of historical pedigree, an expensive squad that is packed full of experienced players. As such the Kodari Magazine picks for Russia 2018, with Lloris, Varane, Kante, Pogba, Griezzman, Mbappe and Martial is France (please gamble responsibly!)