TRANSFORMATION | 04.11.2020
The crisis, a crash course in managing emotions for investors and the sports industry
We interviewed Luis García Álvarez, mutual fund manager at MAPFRE AM and author/coordinator of Inversión y Deporte (Investment and Sport), a book intended as a tool for people who buy assets on the stock exchange and decision makers in sports clubs. Over the course of our conversation, he describes what underpins the strategy implemented for the MAPFRE AM Behavioral Fund—a mutual fund based on behavioral economics—which invests in sport and is the first fund in Europe to adopt a strategy that integrates psychological concepts into economics. In a context of great uncertainty, patience and experience are important values when it comes to investing.
Question (Q): They say the sporting landscape, like many others, has changed due to COVID-19. What changes do they mean?
Answer (A): Above all, the coronavirus has accelerated changes that were already underway in the industry, albeit in a hidden way. We’re talking here about seeking revenue beyond purely physical means, like match attendance or jersey sales, namely by trying to monetize digital assets. We’re also talking about incorporating investors with more serious or professional backgrounds in sport, and soccer in particular, and in line with this second point, having management teams who are better prepared and more professional. These developments, which emerged in the soccer industry a few months ago, are accelerating as a result of lower revenue and are increasing the need for greater imagination. As far as consumers are concerned, the need to consume sport has not only remained, but appears even stronger than before the crisis. What’s changing is the way in which people consume sport.
Q: What do the stock exchange and the transfer market have in common?
They are fundamentally similar: If you follow a suitable process, understand the psychology of the people behind the market and look to the long-term, you will be able to buy—either a player for a team or a share for an investment portfolio—at a price that is lower than the true value of the asset. To put this plainly, it’s like buying a dollar bill with a fifty cent coin. These two markets, both the stock exchange and transfer market, are made up of people and, from time to time, people will behave irrationally. This is when—if we have a set process that we use repeatedly and in a well-structured way—we can find opportunities.
Q: What threats and opportunities currently stand out to you for this market niche?
Firstly, in the world of investment, the last few months have been like a crash course in managing our emotions; they have tested our temperaments and psychology — factors which, as I always say, are even more decisive than the valuations and figures from companies, which are accessible to many. As we saw in March and April, possessing the self-control not to be led by our emotions has been more important than ever before. And, it’s similar in the world of sport: The greatest threat or risk is the transformation of the way in which we consume sport. As we have seen, the good news is that people’s need to do sport has only grown stronger — let’s not forget that the first thing that people were allowed to do once the strictest state of emergency restrictions were lifted was go outside and play sport, showing the key role it has in society. However, the way people are consuming sport, especially young people, is changing. Companies operating in the industry will need to adapt.
Q: How do you implement value investment?
At MAPFRE Asset Management, we describe ourselves as long-term value investors. In essence, by following our planned and repetitive decision-making process and by studying investor psychology, what we are trying to do is use our long-term focus and our patience—which is perhaps one of our great competitive advantages—to seize the opportunities that this market occasionally presents. Although it tends to be rational and efficient in the long-term, in the short-term, we have seen that it can behave irrationally and we can identify these inefficiencies in the form of discrepancies between value and price. This means that we can buy something for a price that is lower than the value that we perceive in that activity. It’s a similar idea with sport; what we try to do as investors is what successful sports managers aim for when they put together their team roster.
Q: They say that psychological factors usually complicate successful implementation. What is happening in our brains at the moment, are we likely to become more shortsighted in our investments out of a fear of the future?
Absolutely. Value investment or having these investment principles has been proven to work in the long-term, so the obvious question then is… Why isn’t everybody doing it? And the obvious answer is that it has to do with our psychology. Not all of us are able to master our emotions or stick to a pre-planned process — and one which we often call into question when we don’t know what’s around the corner. Our brain, the human brain, the most complex structure in existence, was designed and wired many years ago, when people’s needs were more about surviving than about making decisions about our money. And now, many years later, we are essentially using the same tool—because the brain hasn’t changed much—to make decisions that relate to our money and that have a very high emotional component. And in this vein, as you pointed out, I have no doubt that, in the months—or even years—to come, our brain will remind us of what we lived through during these months of crisis and how we watched our investments behave in a very volatile way. We will also have to fight against that as investors.
MAPFRE Behavioral Fund’s investment in sports https://noticias.mapfre.com/en/mapfre-am-behavioral-fund-investment-sports
Valuing assets: risk and uncertainty https://noticias.mapfre.com/en/valuing-assets-risk-uncertainty/