Cricket is often seen as the closest thing Australia has to a national sport. The captain of the Australian men’s cricket team is often laughingly described as the second most powerful person in the country – and in a golden run between 1989 and 2003, three such captains really were chosen as Australian of the Year. So, this week, we thought we would talk about cricket.
Our apologies if you do not like the sport much, because we think it has something to teach us about money management. Cricket is a great a metaphor for money management – it must be all the maths that both cricket and finance demand. Stick with us, though: you won’t need to be able to tell a googly from a flipper to see the point we are making.
This summer, the Australian men’s team has hosted the Indian test team for a series of four test matches. The series was a blockbuster – widely hailed as the best ever, at least for India. How well the series turned out – at least for India – was a huge shock when you consider how the first test, in Adelaide before Christmas, was decided. Having led Australia by 53 runs after the first innings, India was dismissed for its lowest ever test innings score – they scored just 36 runs in their second innings. If that does not mean that much to you, please remember this: it is possible to score 36 runs in one over of cricket, and test matches go for 540 overs. 36 is a tiny score. India had never made less.
Unsurprisingly, India lost that first test. Incredibly, they then came back to win two of the three remaining tests and win the whole series 2-1. That’s them in our photo, smiling after their massive win (thanks, Cricket Australia, for the image).
Recently, a friend of ours (and yes, he kind of likes India), asked us to ponder on the number 36 and where it stands in cricket. Specifically, he pointed out that:
The point for us as here is that scoring the same number of runs in cricket – 36 – can be good or bad depending on when and how you score it.
For us, especially right now, this is something to keep in mind, because the same concept applies to money. Your current rate of investment return is neither good nor bad until you consider the context. For example, you might have a portfolio that earns you 10% in a year. If the market average was 5%, you have done very well. But if the market average was 15%, you have done quite poorly. Same return, but neither good nor bad until you compare it to a sensible point of reference.
Many people with fixed income investments are lamenting that they are currently getting historically low returns. For example, Canstar report (at the time of writing – this link may change) that none of the Big Four banks are offering more than 0.4% on a term deposit. This is very close to a return of zero. But bear in mind that term deposits are a defensive asset, designed to preserve existing wealth rather than create new wealth. If other markets fall, but the term depositer gets their money back plus 0.4%, then they have done well. 0.4% can be a great return – depending on your point of reference.
So, next time you check your portfolio returns, do not focus solely on the rate you have achieved. Place that rate in its context. Think about your point of reference and then ask yourself if the number is good or bad.
(Oh, and remember, as the India team that was bowled out for 36 two months ago went on to prove, one bad return does not mean all is lost. The India cricket team should perhaps come with one of those warnings beloved in the investment industry: past performance is not a reliable indicator of future returns!)
