Like every player in a cricket team plays his part in the team's success, every investment in a portfolio does the same...
04-Apr-2011 •Dhirendra Kumar
Over the next few days, India’s victory in the world cup (and cricket in general), will be connected to a wide variety of things. So I guess it’s okay if I explain a certain point in investing by using a cricket team as a metaphor. In a lot of the public analysis that is done of an investment portfolio (whether of an individual, or of a mutual fund), the presence of any underperforming component is seen as a mistake, or a potential problem.
This is a little bit like saying that a cricket team is no good because in every match, someone or the other fails to perform well. I’m not stretching a point here just to bring in a cricket here. This really is the best way to understand the point. An investment portfolio is a team. So, in the final of the world cup, two of your best batsman didn’t perform didn’t perform. Did it matter? Not really, that’s why there were five others. Not only were the others there a backup if some failed, different ones have different strengths. Some are more useful in flat batting pitches where you just keep swinging, while others come true in more trying circumstances.
There aren’t likely to be any real-life match where all eleven players of a team will perform brilliantly (or be even called upon to do so). A portfolio is not simply a collection of the best investments that are chosen because they are individually good. It has different parts that fit together in specific roles and complement each other. There could be three investments that provide rapid gains and a couple of them stability in case of problems.
The parallel with a cricket team is clear. In hindsight, it’ll later appear that you could have stuck with one or the other but both types played a role, but that’s just hindsight. The whole thing is not just a random compilation. Each part plays a role, and each role has to be played.