I’m not a soccer fan, but I’m also not one to miss the opportunity to work a sports reference into an SMI article. So in light of this weekend’s World Cup finale, which France won by defeating Croatia 4-2, I’m reminded of a soccer study with implications for investors that came out a dozen years or so ago.
In “Action Bias Among Elite Soccer Goalkeepers: The Case of Penalty Kicks,” a study done at the Ben Gurion University in Israel, researcher Michael Bari-Eli studied the behavior of goalies trying to stop penalty kicks. For the non-fans among us, here’s the setup. Penalty kicks in soccer are taken from 12 yards away, and the kicks reach speeds of nearly 100mph. So there’s essentially no time for the goalie to react to the kick — he has to decide to jump to the right or left before the kick is taken.
Actually, there’s a third option — stay in the middle of the goal and not jump to either side. And what this research showed was that when goalies stayed in the center of the goal, they stopped a whopping 33% of all kicks. That was roughly double the percentage stopped when jumping either to the left or right.
Yet surprisingly, goalies stayed in the center only about 6% of the time. 94% of the time they leaped one way or the other.
The likely reason for this is "Action Bias" — the title of the paper. Simply stated, action bias is the preference most of us have for "doing something" in response to a problem, even if the better option might be doing nothing. When we take action, we can always fall back on "at least I tried!" Doing nothing is just so passive. It feels like not trying.
So imagine yourself in a soccer goal with thousands of screaming fans, the game on the line, and some monster about to kick a ball 100mph in your direction. Even if you know the best odds are to just stand there, you imagine what a fool you’ll look like if the ball gets kicked to a corner and you... do nothing. So you jump.
There’s an investing adage that, paraphrased, says it’s better to fail conventionally than succeed unconventionally. Or to put it in the money manager language of a couple decades ago, "No one ever got fired for buying IBM." In other words, if you do what others expect, even if it fails, nobody will think poorly of you. It somehow feels/appears worse if you act unconventionally and it doesn’t work.
What can we glean from this as individual investors? Well, there’s a pretty strong innate drive to "do something" when it comes to our portfolios, especially when the market shifts. It can feel like we’re not trying if we just sit there and don’t take action. But like the soccer goalies in this study, doing nothing is usually the right answer! Research is pretty clear that investors who trade during times of high market stress typically are worse off for having "done something." Those who stay the course usually come out ahead.
One beautiful thing about SMI’s strategies is they do take action as market conditions change. Eventually. The challenge for SMI investors is to trust the system and be patient until the system says to do something. Sometimes there’s an uncomfortably long pause between when the market seems to start shifting and when the system says to make a trade.
Those are exactly the times we need to think back to the goalie in the middle of the net, stopping twice as many penalty kicks as his peers who are frantically diving left and right. The next time the market acts up, don’t just do something... stand there!