Part One: Season Review
With the World Cup at an end this is a great time to reflect on the season just gone as we shape our overall strategy for the year ahead.
Self analysis is really important because we all kid ourselves about how good we are.
I think it is safe to say that for many traders, we have had an absolutely bumper year. For those celebrating, a big cheers all round.
But we must also remember that there are people who have lost money too. And we rarely hear about it. People are quick to boast of wins but not many speak about losses.
The market from the start of the season to now rose so much it was probably quite difficult not to profit overall.
Instead of spending days pouring over spreadsheets, I could have selected players by throwing darts at the top 100 blindfolded and I would probably still made decent money.
This is amazing. But it also sets a trap for traders. There may be a lot of people out there who think they made great decisions but actually just benefited from the natural rises. They could have made serious errors that have been glossed over by the overall gains.
We won’t always get away with this and it is important to stay self critical and constantly identify our “leaks” and eliminate them from our game. (If anyone doesn’t know what I mean by leaks – see my article on online poker strategy and how it can work on the Index).
In Part One of this article I will explain why last year was so profitable for me and many others, and evaluate the big decisions and trades I made. It is important to separate the good decisions from the natural rises so we know what to expect next season.
In Part Two to be published next week, I will discuss where I see the Index going from here, and what my overall strategy is going to be.
I hope readers find it as useful as I have found writing it!
A Simple Benchmark: Return on Investment
So what was a good Return on Investment (RoI) last year? How do we know if we are any good?
I think it is better to compare how we did with the overall rise in the market rather than obsessing over comparing ourselves to others. People often exaggerate and use quite “generous” accounting methods anyway so this isn’t particularly helpful.
A simple (but not necessarily best!) way of doing this is to use the value of the Trackers. In August 2017, a Tracker 100 share (1 share in the 100 most expensive players) would have cost you £190. This week, that is £333. A 75% increase. For Tracker 10 it is £47 then and £80 now. A 71% increase.
So a trader doing nothing but buying trackers last August and checking their portfolio this week would have got around 70% return on investment without accounting for dividends.
As an active trader I definitely want to be beating a tracker. So that seems to me a reasonable benchmark to test ourselves against. Obviously, if you only traded for part of the season you would need to scale it down.
Now we have some idea of the overall rise in the market, we can start to estimate what effect our own decisions had on our fortunes.
As a really broad estimate, this is how I would assess performance (not including dividends):
- 200%+ This level of profit and even greater was achievable last year but it is likely to be a fairly elite standard and not something everyone needs to compare themselves to.
- 100%+ At around this level, we can be happy with our year and are likely to have been making good decisions most of the time (although sometimes you just get lucky so stay honest). We still need to work hard to improve though because it will get harder to sustain that level of performance.
- 70% We have done ok but we need to be a bit worried. We will have made damn good money but we haven’t really outperformed the market. We are vulnerable to losses if the market stops rising overall. This suggests that there are still significant leaks in our game.
- 50% or lower. This suggests we have been making regular significant errors. We are doing worse than the Tracker and need to devote serious effort to getting better if we want to make decent money next year.
- 0% or in a loss. At this point, we really need to consider whether we have the skills, time or mindset to profit in this game. If we want to be involved we may be better off buying the tracker.
This is by no means a perfect method of measuring performance. But as a way of determining whether you are generally making good decisions or not, I think it is useful.
I think I have also set quite high standards and it might seem a bit harsh. But I think it is always right to be. We need to be ruthless in identifying and correcting the regular mistakes we all make that drain our profits away.A Note on my RoI
Personally, I calculate RoI value as the difference between my Install Sell value + bank balance – total deposits for simplicity. It’s the profit I would have if I cashed out today.
Rather than give an unverifiable figure for my RoI, I think it is better to point to the public selections on my watchlist as an example because they are transparent. Everyone following the blog the last few months will know they are right.
The first watchlist picks were published on 8 May when I first started blogging, so in just 3 months we are seeing most players gaining 30-50%. I think this is a creditable goal for a good trader to shoot for in terms of pure value increase over that timescale. So if you annualised the figure that is the right ballpark for what I’d say were very good returns over the season.
I have decided against throwing out my raw RoI number because nobody really believes those claims anyway. But, I will say that I’m really happy with how it went.
If anyone can’t resist a guess at my actual RoI, the following things might help:
- As I only started blogging in May, and I run a long term strategy, I collected quite a few (maybe half) of my public watch list picks before then. So my personal RoI is much greater than what is on the public list, which tracks the value increase from when they were published.
- I also have many more players that are not on my public watchlist. It’s not really a secret, they are probably just not great value to buy now. And I only recommend a player for the watchlist if I think they will increase further. I think the watchlist so far shows that to be true.
- We haven’t accounted for any dividends in the watchlist 3 month figure, so those are on top.
The Three Big Decisions
Rather than review every up and down, I’ve picked out the three major events of last season that contributed to my big profits.Shamelessly Nerdy Analysis of Strong Performance Players
I was really keen on performance buzz being introduced. It is when I started taking the Index really seriously.
I spent many days in pre-season mapping the Index scoring system to historic statistics to create models of who was likely to score highly. And then I bought lots of them.
Many of the players I identified went on to become strong performance players. I was able to get on early to great holds like Messi, Alves, and Marcelo.
But equally, many did not star the season particularly well, like Insigne. In fact, it was probably around a 50/50 strike rate with even the picks I was most confident in.
There are big weaknesses in statistical models like the one I made. For example, it was good at picking out players with very high baselines, but it didn’t tell me that high baselines alone do not always translate to dividend wins. I needed experience of seeing performance buzz in action to make that link.
But it didn’t matter.
By the time the season had begun I was sitting on big profits already. Others had caught on to the strong statistics behind some players by then and because I was early, I profited nicely.
I then had chance to evaluate the players as the season began, trimming any under performers as I went. The rises I was sitting on gave me a cushion to survive any short term dips from one bad game. In this way, I was able to make money even from a selection that did not work out. Or at the very least, I could break even.Riding the Premium Player Price Surge
I strengthened my hold in big players like Neymar, Messi and Ronaldo early in the season as I realised how dominant they would be in performance as well as media terms.
I was able to ride their huge value increases this year for enormous profits, picking up a lot of dividends on the way.
But as they approached £8+, I started to re-evaluate. Steady dividends are good but I make most of my money from value increases. I started to doubt that I would see further major increases, and found a good exit point (usually before a big Champions League game as traders are piling in) to take my profits.
For example, to double my money Messi has to go from £9 to £18, which is not credible. But a £1.50 star I identify early (like I did with Depay) only has to reach £3 to double it, which is very achievable.
Given my confidence in identifying such big risers regularly, it made much more sense to take the profits from my premium players and reinvest them elsewhere.
Most of the time, I was able to sell them for close to their high. But in the case of Neymar, I clearly exited very early. Having bought a lot of him near £2, I sold at £7. This is still a nice profit, but his high is well over £13. It would be easy to beat myself up for this, but I’m basically good with it. I was able to buy other players who have more than doubled in value with those profits.Obvious World Cup Stars
I started collecting likely World Cup stars en masse in late 2017. I felt that the levels of hype for it were already getting out of control. I targeted the obvious stars that the average fan would expect to be big at the World Cup, such as Griezmann, Kane and Mbappé. But I went beyond that into medium and lower priced players for big World Cup teams with good underlying stats. I figured people might catch on and buy them up before the tournament.
I was right. I cashed out most of my early World Cup investments by April and I was often able to double my cash and more. But the price surge for World Cup players went way beyond what I expected. I could have held on even longer.
I was mentally prepared at this point to hoard my profits and wait until late June/July before rebuilding my portfolio. But with prices still rising, I decided to go back in for another bite. Even just a few weeks before the World Cup, it was still possible to buy and sell early in the tournament for sizable profits.
The tournament itself played out pretty much as I thought it would from my pre-World Cup strategy article. I did not really profit from chasing the dividends and I am really glad I sold early and was not left sweating on any eliminations in an unpredictable World Cup. Rather, it was great having cash waiting on the sidelines to pick up any value players who were panic sold.
Trades of the Season
Whilst I like many made a lot on premiums like Ronaldo and Messi, it’s the cheaper and less immediately obvious players that I find most satisfying.
Picking out Depay, Asensio, Parejo, Tolisso, Dybala and Otamendi early were great examples where thorough statistical analysis paid off.
And then some of my biggest profits came on the early World Cup buys, such as James Rodriguez.
Downer of the Season
One of the reasons I play a long term strategy is that I don’t want to have to monitor every game. I watch a fair amount of football but I don’t want to be glued to every midweek La Liga game.
There is a cost to this because I am usually late to know when someone gets a serious injury. By the time I’ve seen, the panic sell has already happened. That can occasionally lumber me with some dead weight as if I don’t see the news straight away, I generally hold if the injury is just a few months. However, I can’t really fix this without spending more time monitoring every game. And I just don’t want to. I have to file this under “the cost of doing business.”
This has happened a couple of times this season, most frustratingly with Thiago Alcantara. I had money tied up in him for months as I patiently waited for him to recover. In his first game back his value started rising only for him to not even finish the game before he had to come off!
My patience at an end, I immediately sold in frustration. But this time his injury was minor and I had to bite the bullet and buy him back.
In terms of what made it a good season, I think the effort I put into meticulous analysis gives me my strong foundation. It supports my long term trading style where I have generally had success in predicting the overall direction of the market.
I’ll have to keep up my effort levels and adapt to the changing circumstances. You can’t just keep applying the same old formula to a new season. The main reason I started this blog, apart from that I enjoy writing, is that it keeps me disciplined on this.
Probably the thing I am most pleased with this season is that I haven’t taken any losses big enough to cause me any great distress. The worst it got was losing around 20% on Thiago’s injury discussed above. This is not luck but a product of the discipline not to chase rises, only buy value players and being ruthless when it is time to cut a loss.
This is important because once you take a loss that makes you emotional, you go on tilt and probably continue to make bad decisions as you chase your losses. Success on the other hand, breed success. Unless of course you let it go to your head and start thinking you can do no wrong!
Whenever I have dabbled in short term trading though, it has gone less well. I find it stressful and I hate having to spend my day refreshing news feeds waiting for that next development. It feels much more like gambling than investing. Some people really enjoy the thrill and make money from it, but this season has reaffirmed that it is not for me.
I kind of win some and lose some and never really feel like I made enough to justify the time spent. No doubt there are people out there who are better at this than me though.
There have also been a few events on the market that have really surprised me this year. From buying Panama players and 17 year old’s for £3 to falling over themselves chasing Mbappé’s recent rise. These are things that just wouldn’t cross my mind. I am very happy to steer well clear of these trades, but I will try to put more thought into potential left field moves.
No matter how experienced you are, playing a game vs opponents who don’t follow the “rules” can be dangerous.
Strategy for Next Season
I am very optimistic for the season ahead. But we can’t just repeat the same formula and expect to maintain our profit levels.
My main takeaway from the above is that many of the reasons I made so much money last year are not necessarily there this year.
I think to get another year like this, we are going to have to work even harder.
Later this week, I will publish Part Two where I discuss my expectations for next season and what I think the best ways to profit will be.
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