Sheldon MacDonald: Net gains - what a tennis great can tell us about equity investing

Imagine you’re a tennis player with hopes of carving out a career on the professional circuit. You make your debut at the age of 17, and during the next quarter-century or so, over the course of hundreds of matches, you manage to win a shade above 50% of all the points you contest.

While it may not sound earth-shattering, this ratio obviously amounts to a winning record of sorts. But how would it translate into actual achievements? Might you sneak through the first few rounds of a tournament from time to time? Would you pull off an occasional major upset? Could you even make a living?

A reasonable guess might be that you would quietly go down in history as something akin to the very definition of “half-decent”. Sure, you would rack up slightly more triumphs than defeats, but you would be a journeyman at best – right?

Not quite. In fact, you would be Roger Federer. In 1,526 singles matches between 1998 and 2022, on average, the man many people still regard as the sport’s greatest-ever exponent won just 54% of the points he played .

This success rate was sufficient to earn victory in nearly 80% of clashes. It brought more than a hundred ATP Tour titles, 20 Grand Slam championships and a total of 310 weeks – including 237 in a row – ranked as the number-one player in the world.

Other sports are home to similar stats. Ronnie O’Sullivan’s accomplishments – trophies, centuries, 147s – easily outstrip those of his fellow snooker stars, yet the Rocket has won less than two thirds of the 13,000-plus frames that have constituted his 30 years as a pro .

Even if they admire sporting excellence, investors might wonder what any of this has to do with them. The simple answer is that much the same story – one of apparently modest feats leading to considerable rewards – can also be found in the sphere of equities.

Riding the rollercoaster

Addressing graduating students at a leading US university earlier this year, Federer remarked on the inescapable ups and downs of tennis. He directly referenced the significance of his 54% point-winning record.

“When you lose every second point on average,” he said, “you learn not to dwell on every shot. The best in the world are the best because they know they’ll lose again and again – and they know how to deal with it.”

Investors would do well to follow this advice, because trying to build a secure financial future is also likely to be a rollercoaster ride. Markets frequently fall, and it can be tempting to see such events as crippling blows.

Take the turmoil of recent weeks. The mega-cap US technology stocks that fuelled the bulk of the S&P 500’s performance throughout 2023 and during the first half of 2024 have suffered sizeable wobbles, wiping trillions off their combined value.

But does this mean it’s time to exit tech or the US as a whole? Might it even indicate equities in their entirety have had their day? Should we all head for the hills, stick everything we have in cash and wait for some kind of sensational turnaround?

Of course not. That would be like Federer double-faulting and deciding to play the rest of a match left-handed. It would be like O’Sullivan missing a black off the spot and breaking off in the next rack with the butt end of his cue – although in his case, it must be said, this prospect couldn’t be completely ruled out.

In reality, far more often than not, the sensible response would instead be to hold firm. As Federer said, don’t dwell on it. Time in the market is likely to beat timing the market, because here, too, we need only for the wins to outnumber the losses.

Possibilities, pragmatism and patience

The effect of this phenomenon over time is especially noteworthy. We can illustrate this by examining the history of the aforementioned S&P 500.

Research shows the likelihood of the index being up during any given month is 62.6%, which is uncannily close to O’Sullivan’s frame-winning ratio. The figure rises to 70.7% for six-month periods and 74.6% for one-year spells.

Extend the investment horizon to 10 years, though, and the possibility soars to 94.4%. Plump for anything between 16 and 20 years – truly the realms of a long-term view – and the magic 100% mark is reached .

This underlines that what applies to top-level sport also applies to equity investing. The respective chances of good and bad outcomes may be roughly equal over the short term, but quality tells over the long run.

The key lesson, then, is to be pragmatic and patient. Accept the market won’t climb each and every day. Recognise setbacks are inevitable and treat them as the fleeting irritations they usually are. Focus on the bigger picture.

Granted, you might not end up with the investment equivalent of 20 Grand Slams or multiple World Championships. You might not join Federer and O’Sullivan when talk turns to who can genuinely lay claim to being the GOAT.

Yet you may well experience an investment journey that’s comparatively free from poor decisions and which ultimately proves to your benefit. And in the final reckoning, all things considered, that’s why every one of us plays this game.

Sheldon MacDonald is Marlborough’s Chief Investment Officer

A version of this article was first published on Professional Adviser: click here

‍

^1. See, for example, YouTube: “2024 Commencement Address by Roger Federer at Dartmouth”, July 2024 – https://www.youtube.com/watch?v=pqWUuYTcG-o.

^2. See, for example, Cuetracker: “Career total statistics for Ronnie O’Sullivan – professional results”, as at September 1 2024 – https://cuetracker.net/index.php/players/ronnie-osullivan/career-total-statistics

^3. See, for example, Bespoke: “Ten simple slides on the benefits of long-term investing in the stock market” – https://media.bespokepremium.com/uploads/2023/08/Bespoke-Reasons-to-Invest.pdf

‍

‍

The value of equities (shares in companies) may fall as well as rise. As a result, investors can lose some or all of their investment. Investment in smaller companies can involve greater risk than is generally associated with investment in larger, more established companies.

This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.

‍