February 14, 2018

Here’s How Investment Risk and Cricket are Similar…

Amit Trivedi
Owner, Karmayog Knowledge Academy

Here’s How Investment Risk and Cricket are Similar…

In the 3rd cricket test match between India and South Africa, we saw something unusual. Both the teams played 5 fast bowlers each. The decision of both the teams was vindicated when the pitch started playing tricks – there was unusual bounce, with some deliveries rising too much and some remaining too low. the pitch kept the batsmen guessing. On the 3rd day of the match, towards the close of play, one delivery from Jasprit Bumrah shot up from just short of length and rose much more than normal. The batsman Dean Elgar was hit on the head. The umpires stopped the play for the day and the players returned to the pavilion.

What happened? Was it just one delivery that the game was stopped? Did the pitch turn dangerous only on that one delivery? Or did it play the same way throughout the match?

If you watched (or even followed it otherwise) the match proceedings, the pitch had been behaving quite erratically, with some deliveries rising too much and some keeping unusually low. It becomes very difficult in such circumstances when the ball is coming to the batsman at more than 140 kmph.

The pitch looked dangerous and the umpires’ decision to stop the play looked in the best interests of the players. However, on second thoughts, it appears that they took this decision only when the ball hit the batsman on the head and not before that. The risk was always present that the ball may hit the batsmen any time on the head. Many previous deliveries had hit the batsmen on fingers and the rib cage, but this was the first one that hit someone on the head.

This is very similar to the way investors behave in the investment world. While the market prices are rising, they do not see the risk, but when the market crashes, people start talking about the risk. In reality, the risk comes down after the prices fall – it is the manifestation of the risk. However, till the time it is not visible, the risk is not felt. It is only after the loss that one is able to see the risk.

One does not realize the risk till things go right and by the time one realizes, it is too late

Fortunately, it was not so late in case of Dean Elgar. The way the umpires decided to stop the play was akin to applying the circuit filter in the market. When there is an unusual price movement, the stock markets are temporarily closed. This works to calm the nerves before the markets resume trading again. In case of the cricket match, there was a different type of movement – the vertical movement of the ball. And how did it work? It calmed the nerves and the match resumed the next day.

Dean Elgar, who was hit on the head, came to bat in the morning the next day and went on to remain unbeaten even when wickets tumbled at the other end.

What happened to the risk? Did it disappear? Or did the batsmen started playing cautiously? We may not know, but there is a lesson for the investors.

The moment you realize there is risk, you tend to be careful. On the other hand, when you think there is no risk, you tend to lower your guards.

Leon Levy has said in his book, “The Mind of Wall Street”, “The risk is often at its lowest when it is perceived to be the highest and the highest when it is perceived to be at the lowest.”

While we celebrate India’s victory in the test match, the investors can learn a powerful lesson from this episode about the way we perceive risk.

In the world of investing, the risk was present before the loss. It did not surface after the loss. In fact, the longer you do not see losses, the higher the risk goes.

All investment management is about risk management. In order to manage the risk, first one needs to understand that there is a risk.

Disclaimer:  This is not a prediction of a crash

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