What Can Test Cricket Teach You About Investing?
The inaugural World Test Championship Final begins today. I don’t want you to watch it only for the test cricket, but, also learn some important investing lessons from this beautiful game. You might say what will a game of bat and ball teach you about investing? Stick around to understand what I’m talking about.
One game that is similar to cricket is baseball. Warren Buffett does a great job of giving the analogy of baseball to investing. Let’s listen to what he has to say:
Listen carefully what he says:
Even Warren Buffett doesn't know about every listed company out there. What makes you think you should? Click To Tweet
I can look at 1000 different companies and I don’t have to be right on every one of them, or even 50 of them
In test cricket, you can let hundreds of difficult deliveries pass through to the keeper. And attempt only those that you are comfortable playing with. Investing in the stock markets is no different — you let the companies that you don’t fully understand pass through and invest in ONLY those that you fully understand.
Now there are many deliveries that the batsman thinks they should play, but in reality, these are the ones that they shouldn’t. Yet, they go on and play those. You know what happens in such cases:
This is what happens to your portfolio when you get into stocks that you don’t understand. Yes, sometimes that edge might go for a boundary, which is randomness. You don’t want your investments to be dependent on randomness, do you?
With the shorter format of the game becoming popular, test cricket might be fading, but there are some players that have stuck to the principles of test cricket. It was Rahul Dravid previously, now it is Cheteshwar Pujara. They both follow two rules —
1. Don’t Lose Your Wicket
2. Never Forget Rule No. 1
They know that if they follow these rules, they will stay longer on the pitch, and the longer they stay, the more runs will they score. Adopt a similar approach in investing — Avoid investing in poor companies, and look to stay longer in the game by avoiding risk. If you manage to do this, returns will follow.
Even though we have some of the greatest batsmen play test cricket, they too get beaten by the best of the deliveries. This means that as an investor, even the best aren’t right every single time. Even if you are right half of the time, you’ll be earning great returns in the long run.
In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten. — Peter Lynch
I hope that I have encouraged you to watch this final from an investor’s perspective. Do let me know about your observations in the comments.
Till next time.