Archive for October 31st, 2007

Analysing financial markets and cricket matches

October 31, 2007

I have been wanting to write this post for quite long but I kept forgetting about it.

I have been noticing for quite sometime that there is increasing similarity between the way we analyse financial markets and the way we have started analysing cricket matches/players.

Analysing financial markets is quite similar to analysing a cricket match and when we pick up certain stocks it is quite similar to picking up key players for the match.

There are two kinds of broad financial market analysis – 1) fundamental analysis (looks at macroeconomics, earnings etc) and 2) technical analysis (looks at charts for trends. I would focus on fundamental analysis as that is where most similarities lie.

  • The fundamental analysts justify performance of a sector/company by highlighting macroeconomy, earnings etc. Now we have analysts in cricket who look at pitch, weather, wind direction etc to predict the course of the match.
  • Most financial research companies pick up sector specialists (those that have worked in textiles, aviation etc) to analyse the sector/companies in their area of specialisation. The idea is that they would have some more ‘insights’ as they have worked in that area compared to someone who has not. This would give them an edge over others and would help produce certain winners.
    Similarly, we have sector experts in cricket-pitch (who talk to groundsman, local ground staff, etc to build their opinion on whether the pitch would suit spinners, batsman, etc.), weather experts (rain, humidity etc).
  • Just like the way analysts dissect the performance of a company/sector in terms of various ratios , multiples, growth numbers to identify winners and loosers we have analysts in cricket that look at various statistics (performance of the  team on the ground the match is being played, best bowling, best batting, averages etc) to predict the winning side.
  • Fundamental Analysis is of 2 kinds- top down (it first looks at macroeconomy, then sector and then companies within the sector) and bottom up (it first looks at top-performing companies and then sees which sectors they are in. And then tries to see whether these companies fit with the macro trend.

    Even in cricket, we have both kinds of analysis. The first would look at who is hosting the match (advantage is mostly for the home team), which place is it being played (whether pitch,weather would suit the home team), then finally the record of individual players in the place, current form etc. The idea is again to pick the winning team (like the winning company)

    The second type of analysis directly looks at current form of players and then sees whether the pitch,weather would suit their style of play. Then they look at the past record of the player on that ground and so on.

  • As if the current set of ratios was not enough we continue to have new ratios, new multiples to understand the performance. Similarly, we continue to have more and more ideas/analysis in cricket matches to identify the likely winner
  • Finally, just like the way stock analysts find it difficult to pick winners, we have the same case in cricket matches as well. There are numerous examples but let us stick to the latest ones. In world cup 2007, no one expected Aussies would be unbeatable and would win so comprehensively especially after the losses to England and New Zealand. Likewise, no one expected India to do so well in Twenty-20.

The learning is not that analysis does not help. It helps as it makes us more aware of the developments. Instead the learning is – it is difficult to pick winners with confidence be it markets be it cricket.

Assorted Links

October 31, 2007

1. WSJ Blog points to a nice interview of  Alex Weber, ECB Governing Council member.

2. Mahalanobis points to a note by Andrew Lo, MIT financial economist which helps you find out if you are a quant.

3. Rodrik pointsto a huge database being built up at UIUC that will code 30 million plus news reports from all over the world going back to 1946. MR points to a new paper which analyses why research is so good in US.

4. PSD Blog pointsto a Jagdsih Bhagwati interview.

5. TTR writeson recent exit of Merrill chief, Stan O’Neal

6. Ajay Shah on capital account convertibility.


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