12 Dec Winning as slowly as possibleRead Time: 3 minutes
Photo by hanson lu on Unsplash
I was recently reminded of a quotation from the Austrian Niki Lauda, three-times Formula 1 World Champion and currently non-executive Chairman of Mercedes-Benz Grand Prix Ltd.:
“The secret is to win going as slowly as possible.”
In the higher tiers of motor racing, the components of the car are designed essentially to last as long as is necessary. This used to be just the race – or even just the few laps covered during qualifying – but in the interests of cost saving, some parts such as engines now need to last multiple races. Anything that lasts longer than necessary is a waste of durability and thus weight and weight is the enemy of speed. An extra kilo of weight in an F1 car costs around 3/100ths of a second per lap over a season. This may not seem much but with a 70-lap race it’s over two seconds, so it can make the difference between winning the race or even the championship or not. Teams and drivers therefore want to limit the wear on those components to their design limits in order to avoid them breaking before the chequered flag has been waved. Driving as slowly as possible helps with that goal. Winning only requires crossing the finish line first. There are no extra points for lapping the rest of the cars so crashing while trying to pass a slow back marker is not a good outcome. The delicate balance between risk and reward is very much in the mind of all the participants.
For those of you who are not followers of motor racing you will be pleased to learn that the rest of this piece is not about racing at all but the more prosaic and universal application of Lauda’s dictum to financial planning.
A couple of years ago we started working with a couple in their 40s who were in the accumulation stage of their lives but who wanted to have an idea of how much they needed to save in order to fund their planned future lifestyle.
One of them held a senior position in a global company and their liquid investments basically comprised cash and various shares. Consequently their focus when judging the performance of their portfolio was on its performance relative to publicly available benchmarks such as those quoted daily on the news. This is very common among both amateur and professional investors and it seems to have some logic in that traditionally, investing is all about choosing the investments which will do best and avoiding those which will underperform.
Where this approach shows its limitations is that most investors around the world are continually trying to do the same thing and all the available assets are owned by somebody. Consequently the prices of those which are traded freely are continuously adjusted to reflect the balance of supply and demand as those investors’ perceptions and expectations change. While it is certainly possible to outperform a benchmark, even over a sustained period, the pursuit of that goal generally absorbs significant amounts of time and/or money, which not everyone can devote to the task. Furthermore, it is hard to know whether such outperformance (or indeed underperformance) as is achieved is down to skill or luck – plenty of academics have covered this issue and it takes a long time before the two are statistically indistinguishable.
At our recent review meeting with the clients, they commented that they felt that one element of their restructured portfolio (the defensive element, comprising mainly short term bonds) had been ‘unimpressive’. Disregarding the fact that the measurement period was pretty short, after discussion they realised that when their investments had all been in shares, not lagging an index representing the stockmarket was a valid measure of ‘success’. When investing to meet future expenditure objectives however, being on track to do that is the measure that counts. Adjusting their mindset to measure the effectiveness of their portfolio by how it helps them to achieve their goals rather than how it compares to some arbitrary benchmark index has been one of the biggest changes they have made. Their portfolio is now much more diversified (so it should exhibit lower risk) and, more importantly, aligned to both their need for investment returns and their willingness to take risk in pursuit of them.
In this instance, they have no need to ‘beat the market’ with their investments so there is no value to them in pursuing an approach which might enable them to do so.
If you do need to do that, then you need to find someone who can manage to do it consistently (in which case good luck, as you will be competing in an arena crowded with very bright people). If achieving your own life goals means that you don’t need a market-beating return (or if you don’t know whether you do or not) you might be better to speak with a financial planner before embarking on that quest.
It might also allow you to reduce your stress level to that of a spectator in the grandstand rather than of an engineer trying to manage race strategy from the pit wall.