Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 70

Dive or stay: the biases of goalkeepers and portfolio managers

Millions of fans around the world have tuned into to this year's World Cup in Brazil. Whether you love it or hate it, the penalty kick is one of the most exciting plays in football. As the striker approaches the ball, often with the outcome of the game hanging in the balance, the goalkeeper has a split second to decide what to do. It’s not unlike the plight of portfolio managers in today’s fast-paced market.

Dive left? Dive right? Stay standing in the centre between the goal posts? The odds aren’t good: fewer than one in five penalty kicks are not converted at this level of play.

In 2006, the World Cup Final between Italy and France came down to a penalty kick shootout. On the first kick, the French goalie chose to dive to his right. However, the shot from the Italian striker went straight down the middle. Had the French goalie stayed at home, the outcome of that shot, and perhaps the game, may have been different.

According to one study, goalkeepers choose to dive nearly 94% of the time.1 In response to the relatively even distribution of kicks between the goalposts, however, and the greater chance of saving those in the middle, goalkeepers who stand and defend the centre may experience a better outcome. Simply put, not taking action may be the best course of action.

Due to what behavioural researchers call action bias, a goalkeeper is expected to act. In the case of a penalty kick, the norm is to dive. A scored goal is perceived to be less disappointing when it follows action. Innate self-confidence, years of training and the crowd’s expectations further contribute to this suboptimal decision. If the goalie dives, he feels that he did his best to stop the ball, and so does almost everyone else.

Investment managers often fall into the same trap of action bias, trading frequently, with confidence that this action adds value. And whether the trades ultimately prove to be right or wrong, the manager who trades frequently looks like he's doing something to generate results. This is one of many behavioural traits contributing to widespread short-termism in the markets.

In recent years, the average holding period for a stock has dropped to about seven quarters (and many studies claim it is much shorter). All too often the concept of buy and hold investing has been subsumed by short-term trading strategies. Many of these trading strategies, which rely on top-down macro-economic calls, are often no better at predicting the future direction of the markets than the goalie who tries to guess which way the shot is going.

Such a short-term bias creates an enormous time-horizon arbitrage opportunity for individual and institutional investors who are willing to take a long-term view. Over very short time periods - say, one week - the average difference between the best- and worst-performing stocks usually comes down to a few percentage points. Move out to one-year and you will begin to see stocks that significantly outperform in any given year. However, as they say, there is no free lunch and many of these high-flying stocks will often see market sentiment turn against their lofty valuations and find themselves at the bottom of the league tables the following year.

By contrast, if you look at the performance dispersion between the best and worst stocks over a five-year period, the numbers becomes quite meaningful. Simply put, over the long-term, the cream rises to the top, with the top 10% of stocks outperforming the bottom 10% by over 160 percentage points. And a common thread among managers who consistently generate long-term results is a strong buy-and-hold mentality. Managers who look to invest in companies that are well-positioned to generate growth over multi-year time periods have the courage to do nothing when short-term trends and negative headlines have the traders running for the exits.

Portfolio managers can lengthen the investment horizon by avoiding the temptation to trade frequently, choosing instead to hold securities for longer periods. Though portfolio managers and goalkeepers are prone to act, an awareness of this action bias may help them recognise that inaction can be an optimal strategy. And deciding to hold the position has the potential to result in a better outcome for their clients — and fans.


Mariana Araujo is a Sao Paulo-based equity research analyst for MFS Investment Management.



Leave a Comment:



What is a ‘long-term investor’?


Most viewed in recent weeks

Australians unprepared for $3.5 trillion wealth transfer

A new report suggests that Australians are ill prepared for the largest intergenerational wealth handover in history. It's estimated $3.5 trillion in assets will be transferred from Baby Boomers to their children by 2050.

Welcome to Firstlinks Edition 534 with weekend update

Many people in the Firstlinks community have been reading my articles and editorials for 10 years or more, and worked with me for decades before that, and deserve an explanation for why I have suddenly stopped writing each week.

  • 9 November 2023

18 rules for ageing well

The rules to age successfully include, 'the unexamined life lasts longer', 'change no more than one-eighth of your life at a time', 'nobody is thinking about you', and 'pursue virtue but don’t sweat it'.

Why the ASX 200 has gone nowhere in 16 years

The ASX 200 is around the same price that it was 16 years ago. The poor long-term performance can be largely blamed on our taxation system, which encourages companies to pay out most of their earnings as dividends.

The challenges of building a lazy portfolio

John Bogle famously advocated a two-fund portfolio of US stocks and bonds. Recently, I tried to create an Australian version of the Bogle portfolio and found that what seems simple can quickly turn complicated.

SAPTO and LITO, or do you really need an SMSF?

Money withdrawn from super after age 60 is tax-free but less understood are arrangements that allows a couple over the age of 67 to earn up to $57,948 per year outside super and pay no tax with LITO and SAPTO.

Latest Updates

Investment strategies

Two proven ways to make big money in markets

Many ASX success stories – like JB Hi-Fi, Lovisa, and AUB – have followed one of two strategies: rolling out single store formats nationwide or consolidating fragmented industries. Here are the secrets behind these business models.

Investment strategies

The bank is still a terrible place to put your money

With the RBA having lifted interest rates by 4.25% over 18 months, many investors now see cash as an attractive investment option. That ignores the silent tax of inflation, which makes other assets better investment alternatives.

Little to fear from APRA's hybrids review

APRA's objections to hybrids are misplaced. If the regulator wants more safety in our banking system, it will come at the expense of effectiveness, and that's why wholesale changes to the hybrid market are unlikely.

Investment strategies

Rates higher = shares lower… is it that simple?

Typically, higher interest rates are associated with lower share market valuations, but not always and the relationship hasn’t been that strong over the long term. Company fundamentals will matter more over the next few years.

Investment strategies

Diversification is not a free lunch

Harry Markowitz said that “diversification is the only free lunch in investing” as holding a broader range of assets can result in better returns without assuming more risk. This has become accepted wisdom - but it isn't true.


Why Asia remains one of the world's best growth stories

China’s economic slowdown and the resilience of the US dollar have dimmed the lustre of many Asian economies’ strong growth momentum in the past year. But heading into 2024, Asia's growth story should reignite.

Podcast: Property picks, PE update, and Warnes on Michelle Bullock

Charter Hall's Steven Bennett talks through commercial property's challenges and opportunities, Schroders' Rainer Ender on private equity's bright spots, and Peter Warnes on how RBA hawkishness will impact rates and the economy.



© 2023 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.