Welcome to Part Two! (Part 1 is here)
For the opening of this site I was asked to write about why measuring performance versus the market mattered. In Part One I reviewed some of my own performance from last season and this season far using the FI Market Cap tracker.
In Part two, I’ll think about what exactly we do with this information once we have it.
What can we learn?
Knowing how we have performed is nice to know. But we’ve got to do something with that information. The above results from the New Trader Challenge and the Pre-Season predictions show good results. But why? And what has it taught me over the seasons?
There are two main factors behind the good results in both portfolios.
The first I’ll call leading not following the market. Particularly in the pre-season results from this year, you can see how self defeating it is to follow into the highly priced players being pumped on social media.
For the real profits you have to find players early in the £2 and under range ideally, possibly pushing £3 for really good ones. You’ve got to be on that rise before they get the big breakout moment and start pushing high prices.
When you miss a breakout moment, it generally pays just to just accept it and move on. Chasing that rise is losing trading most of the time. Yes you’ll miss that occasional player who goes on to rise higher. But you also avoid a lot of the garbage that plummets back down. What we’re looking for is consistent wins which is what matters most to overall returns.
If you look at the New Trader Challenge portfolio which returned 220% - it generally had 10-15 players only at any one time. I couldn’t possibly catch every rise going. And I didn’t need to.
I think the ability to ignore all this froth and social media chatter is key to big profits. Not only do these players generally underperform once the big breakout moment and price spike has already happened, you cost yourself the opportunity to invest in players who can be rising far more.
Imagine the difference it makes to your profits if you are avoiding players lagging 58% behind and instead holding players who push you 81% forward on average. A mind blowing swing.
If anyone ever asks why some people can make 200%+ in a season and others struggle to beat the market at all, this is why. It’s not just picking the right players. It’s knowing who to avoid.
For this there is no substitute for diligent analysis in the right areas. I run through the games in all 5 leagues every week on the site. And I spent many hours breaking down the performance scoring changes from July last year.
For example, this meant that I could pinpoint Kroos as the man to benefit from the performance changes when he was at £1.56. He was the only midfielder to get 5 stars out of 5 in my site performance ratings in pre-season.
By the time he’d proved why in performance scoring and everyone had learned what I already knew, he flew to £4.95 at his high. That’s a 217% profit not counting his considerable dividends.
The second factor which I think is often overlooked is the structure of our portfolios. Both the New Trader Challenge and the Pre-Season Predictions succeeded because of a tight focus on the absolute best, evidence based selections.
This means limiting our portfolio sizes to at least the 20-40 player range. And, crucially, distributing the money between players relatively evenly.
A common mistake I see in underperforming portfolios is the tendency to buy the same number of shares in each player. This concentrates your funds in the most expensive players, and means you don’t have a huge amount of cash in your cheaper players.
When the cheaper players do well and breakout, you don’t get paid enough for your good decision. This can make you a passive trader without even realising it.
Being passive is fine if that’s a deliberate choice. And some diversification is important. But in my view (controversial?), very wide diversification into the 75+ or even 100’s of players is for either very passive traders or traders who don’t know what they are doing.
With a portfolio that large, you are definitely going to have some successes but you will also have lots of losses that drag you back. Taking two steps forward and one step back is another very common cause of an underperforming portfolio. But of course, both of these factors - diligent research and a tight portfolio - work together.
There is no point building a tight portfolio of 20-40 players if your player research and selection isn’t on point. The sloppier your player selection, the more diversification you need.
Over on www.footballindextrader.co.uk, I have a Trading Guides series, and this one on Portfolio Management covers this important topic in more detail.
When I first started taking FI seriously, it was when performance scoring was first introduced. And being handy at Fantasy Football, I thought I’d be a natural.
It wasn’t quite that easy.
My first mistake was thinking I could solve FI in a spreadsheet. That’s how you pick good players on Fantasy, and it’s what I was used to doing. If I could just colour code enough cells I would surely find the best players first right?
Well, kinda. I adapted my thinking from Fantasy and used the FI scoring matrix to pick out some great performance players. I had some good success that way. But I’d also get frustrated when my player would win but still not move up in price much. Or because they’d be performing well but slowly start bleeding out anyway.
My eureka moment was when I realised that I was underestimating all the softer trend factors that matter so much on FI. Age, career direction, media appeal, tournaments, one off events, FI announcements and what they might be.
I was aware of that of course, but it wasn’t until I really started stitching all of these factors including their strength in FI performance scoring together that my results really took off.
There is this false argument that goes on between traders. “Dividends are all that matters!” vs “Who cares, just buy what people will buy!”.
I think both of these stereotypical views are wrong. Why pick at all? Find the performance suitable players who meet all the trend factors ahead and you’ve got it nailed.
The hype trader probably says that because he doesn’t have the ability or the time to find the really good players. And the spreadsheet guy says that probably because the trends frustrate him.
But if you are willing to put that effort in, there is no reason why you can’t find players that everyone agrees on. If the spreadsheet guy will buy them on merit, and the hype merchant will buy them on trend fit, you’ve got a clear winning trade.
Another mistake I have tried to fix in the past can probably be called “coasting”. I was working long hours, tired, not much free time. The last thing I wanted to do was spend my precious weekend sorting a spreadsheet or reviewing match statistics.
So because my portfolio was doing pretty well on it’s own, I’d be guilty of just leaving it sometimes for weeks without really doing anything.
I wished I could just pay someone a bit to do a lot of that heavy lifting for me. But there was nothing out there worth using (which is where I got the idea for my site in the first place).
As I started writing about FI, taking it more seriously and putting more effort in, I really saw the benefits of more active trading and keeping a closer eye on my portfolio.
I still don’t trade every day, and a whole week can go by and I might do nothing at all. Sometimes doing nothing is the best thing you can do. There is no evidence that more trading equals greater profits. In fact, in my experience, it’s the opposite and over trading causes people a lot of problems. But there is a big difference between choosing to do nothing, and doing nothing because you didn’t have the time!
Thanks for Reading!
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