The Investec Wealth Forum - La Grande Boucle, marginal gains and investments

La Grande Boucle, marginal gains and investments

1 August 2017

Team Sky’s success in the Tour De France is built on the concept of marginal gains – a principle that is as true for investment as it is for cycling.

 

The concept of marginal gains – the idea that by pursuing small, incremental gains, we can realise large improvements in performance over time – has been a key to the success of Team Sky in the Tour de France. But the principle is as true for investment as it is for cycling.

I love the Tour de France. Also known by its nickname “La Grande Boucle” which means “big loop” it is in my opinion, and in many ways, a metaphor for life with its ups and downs, highs and lows, successes and failures, heroes and villains.

I was privileged to watch two stages of this year’s edition and even more privileged to be ‘inside the ropes’ with Team Sky (Great Britain’s professional cycling team) for some of the time I was there. As many people (cycling people at least) know, Team Sky has won the last four out of five editions of the Tour.

Apart from the prodigious talents of Sir Bradley Wiggins (winner in 2012) and Chris Froome (winner in 2013, 2015 and 2016) and their respective supporting casts (I could probably tie each team member’s role to an article on asset allocation or something similar, but that’s for another day), much of Team Sky’s success has been attributed to a simple principle known as ‘marginal gains’, a principle which is becoming commonplace not only in the world of elite sports, but across many industries.

Marginal gains explained

In 2010, Sir Dave Brailsford faced a tough job. No British cyclist had ever won the Tour de France, but as the new General Manager and Performance Director for Team Sky Brailsford was asked to change that.

His approach was simple. He believed in a concept that he referred to as the “aggregation of marginal gains.” He explained it as “the one percent margin for improvement in everything you do.” His belief was that if you improved every area related to cycling by just one percent, then those small gains would add up to remarkable improvement.

They started by optimising the things you might expect: the nutrition of riders, their weekly training programme, the ergonomics of the bike seat, the weight of the tires, and so on.

But Brailsford and his team didn’t stop there. They searched for one percent improvements in tiny areas that were overlooked by almost everyone else: discovering the pillow that offered the best sleep and taking it with them to hotels, testing for the most effective type of massage gel, and teaching riders the best way to wash their hands to avoid infection. They searched for one percent improvements everywhere.

Brailsford believed that if they could successfully execute this strategy, then Team Sky would be in a position to win the Tour de France in five years’ time. He was wrong – they won it in two years.So what then can we learn from Brailsford’s approach?

The magic of the aggregation of marginal gains

It’s so easy to overestimate the importance of one defining moment and underestimate the value of making better decisions on a daily basis.While improving by just one percent isn’t notable (and sometimes it isn’t even noticeable), it can be just as meaningful, especially in the long run.

Take a look at the graph below. In the beginning, there is basically no difference between making a choice that is one percent better or one percent worse. In other words, it won’t impact you very much today. But as time goes on, these small improvements or declines compound and you suddenly find a very big gap between people who make slightly better decisions on a daily basis and those who don’t. This is why small choices don’t make much of a difference at the time, but add up over the long term.

Aggregation of marginal gains graph

Marginal gains and investments

If current market conditions are any indicator, not only could investors learn a lot from Brailsford and Team Sky’s approach regarding marginal gains, but it might become necessary over the next few years. The days of relying on a market that continually moves higher and/or standard textbook trades to produce positive returns might be over. Ironically, this is occurring at a time when more and more investors are investing in financial products, or using financial advisers, who rely solely on a continually rising market to achieve their goals (exchange traded funds now manage more money than hedge funds!). And, this is occurring as slowing global growth and diverging central bank policies create a murkier backdrop.

What marginal gains could make a difference to investment success?

Here are some suggestions, many of which I have written about in one way or another in previous articles, but I think they are worth repeating.

1. Save consistently and increasingly

Worry less about squeaking out a bit more performance out of your investments or tweaking your asset allocation to increase your expected return. Rather think about ways to save more.

2. Invest consistently

Stay invested. Keep your composure during difficult markets – you will almost surely be rewarded for it.

3. Plan

Establish appropriate, realistic and manageable goals.

4. Manage expectations and behaviour

Minimise behavioural and cognitive biases that impede your progress and inhibit your success.

5. Asset allocate

The percentage allocation of cash amongst asset classes and investment vehicles within asset classes will have an enormous effect on the performance of your investment portfolio.

6. Manage costs and fees 

A leading factor in the success or failure of any investment is fees. Every investor needs to count costs.

7. Rebalance your portfolio

Rebalance among investment types, such as an equity portfolio, for example, to improve performance by taking advantage of mean reversion (whereby prices or returns move back to their long-term average).

Rebalance across investment types (to return, for example, to a desired weighting of stocks and bonds) to make sure your portfolio is consistent with your risk tolerance.

Rebalance portfolios so as to be as cost-effective and tax efficient as possible.

Conclusion – success is not an event

You probably won’t find yourself in the Tour de France anytime soon, but the concept of aggregating marginal gains can be useful all the same.An approach that aggregates marginal gains through a disciplined plan that targets high-quality investment opportunities will become increasingly important to achieving financial goals over the next several years.

Chapeau to Marginal Gains!

This article originally appeared in Investec Wealth & Investment’s quarterly client publication, ONE magazine edition 4, 2016.

By Patrick Duggan, Wealth Manager, Investec Wealth & Investment

Access the world’s top fund managers today

More insights from the Investec Wealth Forum 2017

The Investec Wealth Forum - The Chinese economic miracle is far from over
The Investec Wealth Forum - European commercial property market rallying
The Investec Wealth Forum - Growth and value investing – an investor’s perspective