"Some people believe football is a matter of life and death...I can assure you it is much, much more important than that." - Bill Shankly, Liverpool Football Club manager
Shankly might have been exaggerating, but it's pretty remarkable how closely Manchester United's fortunes seemed to mirror the S&P 500 in 2016. A tough first half of the year gave way to brief optimism in July and August, which was in turn eroded by mediocre results before an unexpectedly strong finish to the year.
Here are some things I took from this year of watching United and the market - not new lessons, by any means, but ones which were reinforced over the year:
1) Recency bias is everywhere, and the news cycle only makes it worse. Pundits and fans were quick to anoint Pep Guardiola's Manchester City shoo-ins to win the title as soon as his appointment was announced. The hype built further after City thoroughly outplayed Mourinho's United in September. A few months later, we find the two teams separated by a mere 2 points in the league, and the media sharpening its knives for Guardiola. Who knows what will happen by the end of the season?
In financial markets, investors who abandoned energy early in the year missed a gargantuan rally. One of the biggest "stories" of 2015 was the claim that commodity trader Glencore could be "the next Lehman Brothers." Instead, Glencore equity showed a 200% gain. Predictions are hard, especially about the future, but reporting the news is no substitute for actual analysis.
2) Good things take time to build. The flipside of focusing too much on current form is the failure to recognize the amount of time needed to build the conditions needed for success. Fickle fans were ready to desert Mourinho after a string of mediocre results. The parallels with investing are clear. Bill Gates said, "Most people overestimate what they can do in one year, and underestimate what they can do in ten years." Success in long-term endeavors like investing requires incremental improvement that compounds over lengthy periods. This was particularly clear to me in 2016, with a reading list dominated by successful entrepreneurs and visionaries like Sam Walton, Danny Meyer and John Mackey.
3) Focus on process, not outcome. Given the nature of randomness and the need to focus on the long term, it makes no sense to place too much emphasis on individual outcomes. Instead, we need to believe in a well-conceived process and measure intermediate goals. I found myself defending United after draws against Stoke, Burnley and Arsenal. My reasoning was simple: the team managed an impressive 24, 38 (!) and 12 shots on goal in those respective matches. An attractive style of play wasn't yet yielding wins, but the trend was clearly visible.
As globally diversified portfolios continue to lag the US, tetchy investors may be questioning their process. I recently heard a great line from ReSolve Asset Management: "In a diversified portfolio, something is always killing it, and something is always killing you." So true, and so hard to accept. Process, not outcome, therefore should be our focus. One caveat, though: in creating intermediate goals, we need to be honest if they're not being met. As Richard Feynman said, "The first principle is that you must not fool yourself - and you are the easiest person to fool." Louis van Gaal constantly referred to his "process", but success never materialized.
4) Avoid a fixed mindset. Things, and people, change. Players like Marcos Rojo and Phil Jones - thoroughly dismissed by most fans - are thriving under Mourinho. Honest observers will even admit a noticeable improvement in scapegoats like Rooney and Fellaini. The biggest surprise has been Antonio Valencia, who I believed would never be a world-class right back. He proved his doubters wrong in 2016 through hard work and dedication to his craft.
I was reminded of this when listening to Patrick O'Shaughnessy's "Invest Like The Best", one of the best new investing podcasts out there. O'Shaughnessy and financial writer Morgan Housel revealed they were both mediocre students up till college but worked hard in their 20s to achieve success. Carol Dweck has taught us the importance of a growth mindset instead of a fixed one, and we should apply this idea to others. Like us, they have qualities that can change with dedication and hard work.
Eschewing a fixed mindset is especially important when evaluating assets. There's a tendency to view assets "good" or "bad" - compounded by recency bias - when the reality is that most assets are valuable at some price.
5) It doesn't matter how sophisticated your plan is if you can't execute it. Van Gaal was lauded as a managerial "genius" (admittedly, by Ed Woodward), but I always found his tactical descriptions baffling. It appears his players felt the same way, and the result was a series of stuttering, stultifying performances. As I wrote about Dimitar Berbatov, "the very essence of true expertise is the ability to make difficult things look easy... Over-elaboration is the tell-tale sign of the amateur; parsimony, the sign of the master."
Similarly, one of my major conclusions for the year was that most investors need to spend most of their time on better understanding their tolerance for volatility. A simple but robust investment plan will trump a complex one every time if the investor doesn't truly understand the strategy or lacks the temperament to see it through.
6) Success requires balance and a strong foundation. United's vastly improved form in the past 3 months has coincided with Michael Carrick's return to the side. Carrick is the fulcrum that allows players around him to perform better. For now, Mourinho has found the midfield harmony that I pleaded for several months ago.
As a younger investor, I had the usual overconfidence that goes with inexperience. These days, I'm far more attuned to the balance mirroring what we find in skillful physical movement. I wrote a lot in 2016 about the value of making little bets, but the ability to do requires a stable foundation from which to innovate. It's easier to cast a line from a fishing trawler than from a surfboard. This is a subject I hope to write a lot more about in the coming months, since there are clear applications in both investing and life.
I wish you all a productive and meaningful 2017, and look forward to chatting with more of you in the coming year. And fingers crossed for United winning some silverware in the next 6 months!