iCubed

As we prepare for the new soccer season which kicks off in a few weeks you’ll still get 2,000/1 on finding the King alive. (He allegedly died in 1977.) But last year’s 5,000/1 victors are priced at a mere 20/1 this time around. 

In hindsight it looks as though the bookies got it completely wrong on Leicester. Often it is difficult to understand what these odds actually mean. If it is forecast that the odds of it raining tomorrow are 20/1, it means that on 21 days under the same conditions you’ll get rain on one of the days. If it does rain tomorrow, it doesn’t refute the odds. Equally, if we could replicate the position of Leicester a year ago, and run the season 5,001 times, then the team would be expected to win the Premier League only once.  

Maybe Leicester is the exception that proves the rule and 5,000/1 was a fair assessment this time last year. Was it a confluence of extraordinary events that helped upset the odds, meaning it’s highly unlikely to be replicated in the future? Or did Leicester uncover something which meant they were far more likely to win the league than the bookies’ had realised? Neither can be entirely ruled out, though I’m inclined to lean towards the former explanation. 

It took me quite a few years to realise that I was financially far better off being a shareholder in Paddy Power than being one of its patrons. The odds you are being quoted are the ones at which the bookie expects to make a profit; and bookies are extremely profitable after all. So my money is always on the bookie. 

Life isn’t a science experiment. We can’t test whether the bookies were right or wrong on Leicester City. Everything is a counterfactual; what might have been. But there are important insights we can draw from Leicester’s triumph. 

It has sparked inordinate interest in the world of business, which has long looked to sport for lessons on management, leadership and strategies for success. 

The team’s story will be seized on by management gurus as a reminder of lots of popular business themes, most obviously, that size isn’t everything. Corporates will clamour over each other to get Claudio Ranieri on the speaking circuit. And a little premature maybe, but a teaching course at Harvard for Mr. Ranieri can’t be ruled out! 

It’s tempting to look at success and try to understand it with a view to predicting future success. But therein lurks the danger of trying to explain Leicester’s win. 

Michael Mauboussin’s superb book, “The Success Equation” focuses on understanding the relative contribution of luck vs skill in a range of endeavours, from sports to business. Different levels of skill and varying degrees of good and bad luck are the realities that shape our lives; yet few of us are adept at accurately distinguishing between the two. The central thesis of Mauboussin’s book is that it is very hard to identify the sources of outperformance, and success is not necessarily the result of things a manager can control. 

And according to Financial Times journalist Gavyn Davies luck certainly played its part in Leicester’s triumph; the acquisition of several players for next to nothing; a lack of injuries; no European commitments; favourable referees’ decisions and also the shortcomings of rivals.

Leicester’s self-effacing manager, Claudio Ranieri, would likely agree that he has not suddenly gone from, what Jim Collin’s might describe as, “good to great”; nor is he simply riding his luck. We must accept that the seemingly impossible can happen in sport and equally in business, and that there may not be a simple explanation or formula to explain it (nor for us to emulate). The “do this and get that result” coughed up repeatedly in management textbooks fosters a simplistic sense of what it takes to succeed.

For those of us in the investment industry the lessons are plentiful. Recognising that skill will dominate luck in the long term I’ve developed an attitude of equanimity toward luck. If you’ve put yourself in the best position possible to succeed, you should accept whatever results appear. During very challenging times for financial markets, this philosophical view has proved extremely valuable.

Maybe the bookies have learned some lessons also from Leicester’s triumph. The longest quoted odds for any team this season is a meagre 1,000/1. With the Foxes at 20/1 to win this year’s Premiership you might draw the conclusion that Leicester really has unearthed something important that the bookies are now only waking up to. I’d urge caution on that conclusion; Foxes fans will be aware that they are only 10/1 to be relegated. 

Relative mediocrity is not destined for Leicester, but it’s a more likely outcome than repeat success. One thing I’d be fairly certain of though; if Leicester City do it again this season, Mr. Ranieri’s modesty will truly have been misplaced; as will my cynicism. Go on the Pool! 

Gary Connolly is Managing Director of iCubed, an investment training, research and consulting company providing investment support to financial advisers and chairman of the valueinstitiute.org. He can be contacted at gary@icubed.ie.