What Penalty Kicks In Soccer Can Teach You About Investing

Growing up I played almost every sport imaginable, but in my early years it was all soccer.  This was largely influenced by my father who was a passionate player himself and he ended up coaching me for my entire career.  The other day I was watching highlights of an MLS soccer game where a Toronto FC player scored a late goal in the 90th minute off a cheeky penalty kick right down the middle (CLICK HERE).  

A Little Bit About Penalty Kicks

I couldn't help but see a lesson in the kick. Not a soccer lesson mind you, a lesson in investing.  Before I go any further with this, I think it makes sense to walk you through some data around penalty kicks to help make my point. Start by imagining yourself taking a penalty shot in a high stakes game like the World Cup.  You know going into the penalty kick the odds are likely in your favor. The data shows 75% of kicks at the professional level are successful.  I feel bad for the goal keepers.

[1] The average penalty kick has the ball moving at a pace of 80 miles per hour.  The keeper is at a major disadvantage as the penalty kick marker is located only 12 yards away and the net stands at 8 feet high and 8 yards across.  The keepers best bet is to make an educated guess on the direction of the kick to have any chance of making a save.  If the keeper happens to guess wrong, your chances of scoring a goal increase to 90%

[2] The best penalty kick is one placed directly to the corner with enough force that even if the keeper guesses correctly, they are unable to make the save.  The catch is, aiming directly at the corner comes with a fair deal of risk.  Any slight error in your aim can easily result in hitting the post or a total miss all together.  Because of this, players tend to ease up on the power but still must make the decision between going either left or right.  Most players' dominant foot is their right, which tends to lead them to aim their shot to the left side of the net.  It's easier to kick across your body than to the outside. Keepers know this and the data shows that keepers jump to the left side of the net 57% of the time and the right side 41%.

[3] If you do the math, you'll notice that this leaves 2% of the time where the keeper goes to neither side (2 out of 100 kicks!)  By sticking your shot right down the center, you can actually increase the odds of a successful penalty kick tremendously. In fact, the data suggests that kicks down the center are 7% more likely to be successful than picking a corner!

Reasons to Consider

This begs the question, why would any shooter not take a shot down the center? One reason is that aiming down the center just sounds like a terrible idea and feels totally unnatural.

The second reason could be due to the fact that a kickers success down the middle has more to do with their advantage of being the one that dictates the direction, where the keeper must guess.  The opportunity down the middle comes because the keeper is forced to guess where the player will shoot if they want to make the save. If every player kicked it down the middle every time, it wouldn't be all that hard for the keeper.

The third reason, to which many players would never admit, is due to the shame that comes with the possibility of striking it right into the keeper's hands. Just imagine being the kicker in a World Cup match. You can increase your odds of winning by striking it down the center, but with this comes the risk of looking like a total buffoon, letting down your team, and your entire nation.  

The alternative is to place a shot to either corner.  You still have a good chance of becoming victorious, BUT if the shot is saved the crowd will likely cut you slack and view the keeper as the ultimate hero for making the save. You'd think that the penalty kicker's primary motivation is to win the game. But if we look at the information presented above, the data suggests something else is going on beneath the surface.  

Down the center is clearly the best selection if you want to win the game, but as it stands, only 17% of shots are taken down the middle. Could it be players must decide between the team or their own reputation?

Here's Where the Investing Lesson Begins  

There is a ton evidence which suggests, for an investment portfolio to outperform the market, you must make different investment selections than the rest of the crowd (like making the decision to shoot down the middle in penalty kicks).  Many times, this means running highly concentrated portfolios and holding for long periods of time, even during poor market periods or poor stock performance.

[4] According to a known concept named "closet indexing", some investment/asset managers will choose to take a more passive management style which tends to result in similar returns as a certain benchmark index.  It's my opinion that this is likely the result of many fund managers fear of underperforming by a wide margin, and losing credibility in the process. Just like the penalty kicker, an investment professional's success or failure is highly public.  If a money manager makes a decision that makes them look foolish, not only do returns suffer but these returns are highly publicized.  And in certain circumstances managers can lose their jobs.

Like the penalty kicker, I believe some investment managers, whether intentionally or unintentionally go the route with the least amount of risk to their reputation to avoid any shame, or the risk of losing their job. Managers often invest in a way that prevents near term underperformance, with the unintended consequence of sacrificing long term outperformance (My next article will explore why short-term underperformance is an ingredient required for long term outperformance).  

Portfolio holdings end up look extremely similar to the stock market index, which you can own for a fraction of the cost you pay the investment manager. If asked most would never admit that they would choose the private benefit of maintaining their reputation over the common goals of their team or their investors.  But it's not uncommon for someone to place their own interests before those of others.  

Does this make all those soccer players and fund managers bad people?  If you asked a behavioural psychologist, they'd probably argue it makes them human.  Many of these players and investment professionals may even be unaware these types of psychological influences are occurring.

Luckily at Endeavour Wealth Management we spend a fair bit of time not only educating ourselves about the markets, but the behavioural psychology that comes along with them.  We prefer to stack the odds in our clients' favor, and like the soccer player shooting down the middle for the increased chance of a win, we increase our client's chances of long term investment success by selecting the less conventional route both in the investments we select and the managers we will use.

- Brandt Butt, Investment Advisor

Brandt Butt is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

[1]Levitt, Steven D.; Dubner, Stephen J.. Freakonomics Rev Ed: A Rogue Economist Explores the Hidden Side of Everything (p. 321). William Morrow. Kindle Edition.

[2]Levitt, Steven D.; Dubner, Stephen J.. Freakonomics Rev Ed: A Rogue Economist Explores the Hidden Side of Everything (p. 321). William Morrow. Kindle Edition.

[3]Levitt, Steven D.; Dubner, Stephen J.. Freakonomics Rev Ed: A Rogue Economist Explores the Hidden Side of Everything (p. 321). William Morrow. Kindle Edition.

[4]Kaufman, Karl, Here's Why Warren Buffet and Other Great Investors Don't Diversify