Wimbledon, Markets, Bad Analogies and You

Sam Querrey awaits a serve from Italy's Thomas Fabbiano in their first-round match on Court 11, nine days before his shock quarterfinal win over Andy Murray. Photo by Elisabeth Dellinger.

Hello readers, today I'm going to be self-indulgent and treat you to a "What I Did on My Summer Vacation" essay, complete with two (probably bad) analogies to tie it to markets. When one is a tennis nut and finally gets to attend Wimbledon for the first time-and spends several hours queuing for it-one generally wants to find a way to write about it. So here, friends, is what this year's tournament can teach you about investing.

1) Past performance doesn't predict the future.

Entering the tournament, Andy Murray was the World #1 and reigning Wimbledon champion. He steamrolled his way through the first four rounds, bringing him to Wednesday's quarterfinal match against Sam Querrey-the last American standing and 24^th seed. To get there, Querrey battled through two five-set epics, including a third-round match against France's Jo-Wilfried Tsonga that spanned two days. But most presumed his Cinderella run would end at Centre Court Wednesday. After all, Murray was riding a 25-0 streak against Americans.^[i] But he was also nursing a bum hip, and Querrey brought his A-game. Five sets later, Murray's streak was over, and Querrey was through to the semis.

Streaks and patterns always repeat...until they don't. True in markets as well as sports. US stocks beat non-US the past four years, but non-US is leading so far in 2017. Energy was the MSCI World's best-performing sector last year, but this year it gave up all its relative returns and then some. Year to date, the world is up 10.6%, while Energy is down -10.4% ^.[ii] Absent a valid reason why a pattern or trend may persist, its mere existence isn't much to hang an investment decision on.

2) Cost is more than just money.

Our grounds passes for Wimbledon's first day technically cost £25 each. But that is only the seen cost. If it were the actual cost, we never would have scored tickets, because demand would have been stratospheric. We got in only because unseen costs limited demand.

Unlike the other three Majors, Wimbledon doesn't just sell tickets in an online free-for-all, where they'd sell out in seconds and create big profits for resellers. Instead, to limit "ticket touts" as they're known across the pond, they regulate sales pretty strictly. If you aren't lucky enough to win the lottery for a chance to buy tickets several months in advance, and you still want to go, then-in the great British tradition-you queue. And to block resales and ensure only the die-hards get in, there is no reselling tickets after you queue, and no holding spots in line for a dozen people. Instead, you get a queue card when you show up, which lists your numerical place in line. When you get to the front, you show your card, buy your ticket (cash only!), then go straight in. Tickets are first come, first serve-500 for Centre Court, 500 for Court One, 500 for Court Two, and about 5,000 grounds passes giving you access to the smaller courts and Henman Hill-that huge lawn picnic area, named after Tim Henman^[iii], where those who can't get into Centre Court can watch the matches on the huge screen.^[iv]

Which means my actual cost to get in was this:

• £25 for the ticket
• £18 for the Uber we had to take because the Bethnal Green tube station didn't open on time
• £10 for the three cappuccinos I bought while queueing because, unlike in America, "triple cappuccino" doesn't mean three shots. It means three drinks
• Four and a half hours spent queueing in a park on a drizzly morning
• The hassle of waking up at 4 am while still jetlagged

The unseen costs-particularly the last two-are what keep tickets available and monetarily affordable for tennis fans. To snag a Centre Court ticket, you generally have to camp out in a tent for a night or two. Even greater opportunity costs!

In investing as well as life, it's all the unseen costs and consequences that often determine success or failure. If you sell out of stocks when things get rocky, it technically costs you only commissions and whatever the taxman claims. But it also costs you whatever the market does while you're out of it. For folks who sell out during a brief pullback or correction (short, sharp, sentiment-driven drop of about -10% or more), that "cost" usually entails missing a quick recovery that would have erased whatever downside you participated in. From there, missed returns can add up fast. I've seen unseen costs like this jeopardize folks' retirements. They may not be easily quantified, but they are very real, I assure you.

If you think of trading costs solely as monetary, then it's too easy to trade impulsively and shoot yourself in the foot. But if you think of the costs in terms of "what am I potentially giving up if I do this," it forces you to be more introspective and consider all the risks. Do that, and you're much likelier to remain disciplined and capture bull markets' long-term returns.