“It’s not how well you play the game, it’s deciding what game you want to play.”Kwame Appiah
There are countless games and strategies that can be played within the investment universe, and success or failure is highly influenced by which game you choose to play. Yen Liow, Managing Partner and founder of Aravt Global recently gave a fascinating presentation at the 2021 Microcap Leadership Summit called “The Game Within the Game”. In the presentation, he emphasized that game selection is the most important decision you will make as an investor. His research shows that you can often find a persistent edge investing in inefficient market niches where there’s less competition.
To expand on the theme of game selection, I’d like to tell you the story of Jon Montgomery who is a master at game selection in sports. You may be wondering what an athlete’s story has to do with investing success, but stay with me.
Jon’s a Canadian skeleton racer who won a gold medal in the men’s skeleton event at the 2010 Winter Olympics. He became one of the most well-known Canadian Olympians when after winning gold, he made a triumphant walk through the Olympic Village holding a pitcher of beer with the Canadian crowd surrounding him singing the national anthem. You might imagine that as an Olympic Gold medalist, he probably found his chosen sport at a young age, trained relentlessly for the next 10 years and achieved his Olympic dream at the peak of his athletic development. But that couldn’t be further from the truth.
Jon grew up on the Canadian prairies and from a very young age he had a burning desire to represent his country at the Olympics. In his early years he spent his free time playing sports. He excelled at ice hockey, but eventually realized that he didn’t quite have the elite skill level that would get him to the Olympics. He tried speed skating for awhile, but soon realized the competition was too far ahead of him and it’d be too difficult to catch up. At the age of 22, he moved to Calgary, Alberta and got a job as an auctioneer. He had all but given up on his Olympic dream. But then he saw the Canadian men’s hockey team win gold at the 2002 Winter Olympics, and his dream was rekindled. As luck would have it, around this time, he visited the Canada Olympic Park which was the venue for the ice track sports at the 1988 Calgary Winter Olympics. It was here that he first witnessed a skeleton racer bomb down the ice track.
If you’re unfamiliar with this sport, here’s the gist of it: from a running start skeleton athletes plunge head first down a steep twisty ice track on a sled that looks like a cafeteria tray with blades on the bottom. Gliding only a few inches off the ground, the fastest racers achieve speeds of 140 kilometres per hour. Skeleton racing’s not for the faint of heart.
Jon decided right there that he had to try this sport he knew nothing about.
Starting a new sport at 22 years old is not the usual path that future Olympians take. In many sports, by the time an athlete reaches their early twenties, they have often been training in their sport for more than a decade and are nearing peak performance. But Jon realized very quickly that unlike the previous sports he had tried, despite his very late start, the barriers to achieving Olympic success would be much lower in skeleton racing. There were a few reasons for this.
Firstly, skeleton racing was a relatively unknown sport and wasn’t included in the Olympics before 2002 other than a handful of years. This naturally discouraged serious athletes who had Olympic dreams from taking up the sport. Secondly, there were significant geographic barriers to training with only a handful of ice tracks in the world suitable for skeleton racing. Lastly, there is a high perceived risk to the sport of skeleton racing. These factors naturally eliminated a significant portion of his potential competition and gave Jon a much higher chance of winning at this game.
Fortunately for Jon, one of the few ice tracks in the world happened to be located a short drive from where he was living. He immediately signed up for a Discover Skeleton school and his skeleton career was set in motion. He stumbled through the first few years of racing with several crashes and lots of ups and downs. But his hard work paid off when he earned a spot on the World Cup team in 2006. He kept moving up the rankings on the World Cup circuit and in 2009, he finally qualified for the Canadian Olympic skeleton team.
Jon came into the 2010 Vancouver Olympics as a hometown hopeful. He put up some very good training runs, but after the third of four runs he was sitting in second place within spitting distance of Martin Dukurs of Latvia. On his final run, he had one of the best runs of his career and he edged out Dukurs by a fraction of a second to take home the Olympic gold and his Olympic dream was achieved.
There are lots of investing lessons that can be learned from studying Jon. For example, there is a lesson to be learned about resiliency and bouncing back after adversity. But in my opinion, the most important lesson is picking a game that you can win. There’s no question you have to be a phenomenal athlete, as Jon was, to win a gold medal in any Olympic sport. But if he chose a different sport with a much greater pool of elite competitors, he might have been less likely to achieve success. He was able to increase his chances of winning because he found a sport with much less competition. Likewise, if you can choose an investing game in an inefficient market niche with fewer competitors, you are more likely to win that game.
So how do you pick an investing game you can win? Well, if you follow Jon’s example, you may want to focus on a game that weeds out most of your high-level competitors with the following strategies:
First, you can focus on obscure niches of the market that are the investing equivalent to skeleton racing where pricing inefficiencies are more common. The average retail investor is much more likely to be attracted to sexy and exciting companies like Tesla over an obscure microcap company with a monopoly in a niche industry .
Second, you can eliminate most of your elite competition by investing in corners of the market where they are restricted from investing. There are 160,000 chartered financial analysts (CFAs) and countless more smart investors with other three letter finance designations. Because of the size of the institutional assets most of them manage, and the investment mandates they need to follow, they are shut out of certain areas of the investment universe by market cap size and geography. Wouldn’t you want to compete in the nooks and crannies of the market that would eliminate most of these professionals from competing against you?
Third, look for areas where the perceived risk is much higher than the actual risk. You would think that skeleton racing is a dangerous sport, but severe injuries and fatalities are so rare there is not even a fatality database kept for the sport. Likewise, there are areas of investing that are perceived as high risk areas, but are actually much less risky if you know what you’re doing. These are ripe areas to look, with the potential for market beating returns.
Being a skilled investor doesn’t guarantee success. But if you choose the right investing game and play it against limited competition, you will most definitely increase your chance of outperforming even the best investing professionals.
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