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Sorry to miss you last week, but I’ve actually been down with the dreaded virus.
And let me tell you, there’s no better advert for getting the vaccine than actually suffering from covid itself. I’m aware that it can affect everyone differently, but my particular case has been quite grim.
Ironically, I was booked in for my vaccine last Wednesday, and was within days of getting jabbed when I finally succumbed to the disease.
I didn’t manage to keep up with much of what was going on in the markets, though it doesn’t look like much has changed.
Instead, I watched a heck of a lot of the Euros, and Wimbledon.
I discovered one very interesting thing watching a young British lady – Katie Boulter – at Wimbledon. She’s ranked around the 200 mark and was playing the number 2 seed.
Having recently read the book Soccernomics about the data behind football, I was well aware of the incredible home advantage that you get from hosting a major tournament in football (the 1966 world cup win was in England, after all).
This tennis match was the day after England had beaten Germany at football, and national sporting fever was high.
So as the commentators banged on about how unlikely Boulter was to win, I found it strange that no one mentioned the huge home advantage she had, playing on Centre Court in front of a home crowd.
I decided to look up home advantage in tennis.
And to my surprise, it turns out that there’s a bunch of studies which have concluded that there is a noticeable home advantage in men’s tennis, but no discernable one for women?
I find this bizarre?
Boulter went on to win the first set and give a very good account of herself before ultimately falling short, but exceeded expectations.
Then, the story of the week was Emma Raducanu, a young English wildcard who has won her first three matches in some style, having never won a senior women’s match before.
Can there really be no home advantage in women’s tennis? Surely it played a part for both of these players.
If anyone knows the answer to this, or can explain it to me then please do.
Get in touch here…
The other sport that loomed large was obviously the euros.
And boy… the good times are really on! Quite strange to be alone in my flat, hardly able to raise a cheer when England put two past the old enemy Germany, but great nonetheless. And an easy win in a quarter final – who’d have thought!
And this got me thinking too.
Lots of people bet on the football.
And there are different strategies.
Some will bet on their own team, because then if you win it’s absolute euphoria. England beat Germany and you make a killing.
This, I guess, is leverage. Emotional leverage.
If your team wins you get double the joy. If they lose, double the pain.
Sometimes people will do the opposite though.
They’ll bet against their team.
That way if they lose, at least they get some money out of it.
And if they win, well, they’ve won! So who cares about the money.
This would be like… hedging? I guess?
But what got me thinking was that in the end, whichever strategy you use, it doesn’t really matter unless you’re making good decisions.
If you make two bets with leverage, and two that are hedged, and get one right and one wrong, then they cancel out.
What really matters is good decision making.
In investment, there are so many strategies out there.
But as Bill Hwang found out, outperforming the market by using crazy excessive leverage doesn’t make you a genius. In fact it makes you a systemic risk, as when his bets went wrong, he almost imploded a few global banks along with his own fund.
When looking at a fund manager’s performance – make sure to check what leverage they’re using. Because you can look really good, smashing the benchmark, if you just lever up three times and buy the index. A lot of people have made pretty successful careers out of variations on that strategy, but as Bill Hwang showed – it often runs out of road eventually.
I find the humility of hedging slightly preferable – but I guess I mean diversification here. Having a balanced portfolio which can perform well in many different scenarios.
The kind of hedging at very fancy funds, where people bet both ways on the same asset, often using leverage too ironically, seems odd to me.
That’s what Long Term Capital Management did. They too almost took down the financial system with them, when their bets caught up with them.
What they did was try and see when the bid/ask spread (difference between the buying and selling price on the market) was particularly wide or narrow. They’d then take both sides of the bet, profiting if the spread ‘normalised’ (narrowed, if it was too wide, or vice versa).
They thought they were so perfectly hedged that they could never lose.
But really they were just picking up pennies, waiting for the biggest steamroller ever.
All the best,
Co-editor, Exponential Investor