Tuesday, 3 June, 2008

Lessons from IPL cricket

Lessons from IPL cricket

Dear Folks,

Now that IPL is over and you've taken rest for a couple of days, it is time to share this mail that I got from a friend while the IPL was still going on. I did not wish to compete with Warne, Watson, Dhoni, Shah Rukh, Slapping Bhajji, crying Sree, etc. Hence I waited till now to share this with all of you!!!

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Unfortunately, I don't know the name of the original author - Those of you who know (or have access to the March issue of "Financial Advisor") - pl leave the name of the author as a comment after reading this blog.

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The original author of this article says: "In several of my write ups on investments I use analogies from cricket…my article in the March 2008 issue of 'Financial Advisor' was titled 'Lessons from Cricket'."

Cricket today is a highly competitive activity and it has also become a lucrative career, more than its status as a game. There is huge quantum of money involved hence it attracts a lot of attention, talent and is very competitive.

The on going IPL event is a classic case from which analogies can be drawn and lessons be learnt for investments.

(This is based on info available as on 7th May 2008)

The Jaipur team i.e. Rajasthan Royals and Kings XI Punjab-the Mohali team head the rankings so far with 10 points each.

This is followed by the Delhi and Chennai teams running neck to neck currently, in the next slot is Mumbai and at the bottom are the teams from Kolkata, Bangalore and Hyderabad.

More than the cricket, I am fascinated by the 'out and under performance' of various teams, the 'randomness' of out and under performance, as well as the 'expert' prediction regarding this.

To refresh memories,

At the start of IPL-Rajasthan Royals were considered the weakest team. They had a bad start and so did Kings XI Punjab…both these teams are currently at the top.

The team from Kolkata had a dream start; its opening batsman from New Zealand went ballistic in the first match itself and hence the 'Knight Riders' were considered as brilliant.

The team from Chennai was among the best as it went on a winning spree and was headed by MS Dhoni. A few days back an article in a newspaper had mentioned that Dhoni had justified his large pay package, since team Chennai was on a winning streak. Ironically, soon after this, the performance of Chennai Super Kings has tanked.

Welcome to randomness of 'out and under performance'…the harsh reality in any competitive activity wherein expert predictions and forecasts are akin to throwing darts at a swinging pendulum. If the prediction (dart) hits bullseye the expert attains stardom and if his dart misses the mark-one can always give a detailed explanation in hindsight.

As the tournament got under way-the Rajasthan team proved to be better than most teams and are currently at the top of the league.

The strong Chennai team is struggling since the past 3 games which they have lost miserably and have thus fallen in the overall rankings. They were right at the top i.e. the 'top quartile' and now they are down to a lower rung.

The Kolkata team which began with a bang is currently at the bottom of the league and appears to be struggling.

'Past performance is not an indicator of the future' or 'Past is not the prologue' is a harsh reality in IPL. The 'out and under performers' are changing continuously and rapidly.

E.g. no one at the start of the competition could have ever imagined the pathetic performance given by the Bangalore side till date. This side which is captained by the solid Rahul Dravid has done so badly that the team CEO-has been sacked. This was reported by the media today.

The Hyderabad side an otherwise solid team (at least on paper) also has had a below par performance so far and is in the 'bottom quartile' of rankings.

The Mumbai team had a series of misfortunes with its captain and star batsman Tendulkar unable to play because of an injury. The replacement captain is also out of the team on account of unruly behavior.

No one could have 'predicted and forecasted' that Pollock would have to captain the Mumbai side…he has been doing it quite well. The Mumbai team had a forlorn, almost demoralised beginning but is now moving up the ladder.

In fact they beat the strongest team so far-the Rajasthan Royals y'day. The Royals were all out for a miserable score and the Mumbai Indians won convincingly. And as I wrote earlier-the Royals were supposed to be the weakest team at the start of the tournament.

The Rajasthan paceman who wrecked the strong Chennai side by taking 6 wickets just the other day-was thrashed by a relatively weaker Mumbai side y'day.

Phew! Welcome to more randomness and more unpredictability of out performance (s)!

What do we conclude?

    Past performance is no guarantee to the future in any competitive activity whether cricket or investments. Some of the best players have had a below average IPL so far and vice versa. (Bad luck for some one who tried to predict and forecast).
    Cricket and active fund management have highly motivated professionals-most of them with similar skill sets and talent. Their rational self interest to 'out perform' brings out the best in these individuals.
    Unfortunately for them they are 'fighting' against each other in an attempt to 'out perform'. Hence by default some or a large number of individuals will 'under perform' at any given point in time.
    Says Jack Bogle, "By and large, fund managers are smart, well-educated, experienced, knowledgeable, and honest. But they are competing with each other. There is no net gain to fund shareholders (unit holders) as a group."
    Any competitive activity which involves a high number of skilled and motivated professionals like cricket and active fund management results in 'random individual out and under performances' time and again. This inconsistency is a fact of life when so many people using similar techniques and with similar motivation are placed against each other.
    The 'man of the match' is different on different days and this cannot be predicted in advance.
    One may indulge in all kind of expert forecasts-but predicting the future 'out performers' is a futile activity. Almost like throwing darts! The IPL example explains a lot.
    The 'average' or index return is the average of out and under performers. In investments this represents the realistic returns from any asset class or its sub category over the long-term. This is because the 'out and under performers' will keep changing all the time.
    In IPL cricket the final winner will be the long-term 'out performer' (I will not try my luck at this prediction just as I don't for the market, stocks and great fund managers).
    In IPL the average according to me will be the 2nd and 3rd slots, as they also will get handsome financial rewards-just like long-term index fund investors.
    All teams below this are the 'under performers'. Many of my (expert) friends are trying to predict the team that will win the IPL...however, like any good analyst I will personally do this in hindsight by giving a detailed explanation ! Please wait for this till the end of the event.




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