For this week’s FIT Guide topic I turned to Twitter for inspiration. One response on capital appreciation versus performance scoring/dividends got me thinking about the false choices that are often presented to traders if they pay attention to social media.
Why PB matters ,buying pb players but not for the dividends.....because smaller /newer ports may be chasing CA but can get some good CA from pb players even though they are not focussed or aware of PB as much as not investing for dividends— Fi_FplAddict⚒ (@Fi_FplAddict123) August 15, 2019
Do we have to pick between seeking capital appreciation and winning dividends?
Do we need to spend hours trawling through stats to find players who are really good or do we just need to guess who other traders will buy because they fit a trend?
There is a lot of debate on this topic. Not all of it is great quality. And for me, there is a fundamental logic flaw in this whole discussion and I’ll explain why.
The Stereotypical Traders
You could be forgiven for thinking you have to pick a “personality type” in Football Index trading from a very limited selection.
I’m going to be mean and look at three extreme examples to illustrate the point. The trend driven “capital appreciation guy”, the stats driven “spreadsheet guru” and the passive “dividend collector”.
Capital Appreciation Guy
Capital Appreciation Guy says “Dividends are worthless. It’s all about Cap App!”. He’ll tell you that you don’t need to care whether the player is actually any good at performance scoring or whether they will ever win media or not as long as he matches the profile of “what people buy”.
This trader tends to have a portfolio full of absolute garbage players when it comes to actually winning any dividends now or in the future. But they do have a decent trend fit and resemble players that people have bought in the past.
He’ll typically get some big sugar rushes of gains as people chase a youngster who came off the bench and scored a goal and he’ll profit nicely when this happens at certain times of year.
But he’ll also get a lot of setbacks as the hype fades, the trend moves on, or the worst thing that can happen to a hype player – they get a run of games and reveal that they are bang average.
Safe on the bench, people can dream their player is the next Messi. In the glare of the floodlights, it becomes clear they are more likely to be next seasons impact player for Stoke (no offence meant Stoke fans).
If you buy enough hype players then occasionally you’ll hit a gem and your average Cap App Guy will be loud about that impressive feat of selection nouse.
But because this trader is typically lazy on his stats research, his failure rate is going to be very high and he won’t really know which ones he should keep and which ones he should sell. He doesn’t understand their true quality and can’t make good value judgements.
But he does tend to have a good understanding of what people have bought recently and a feel for what people may buy next. And that is an important skill to have.
At the other extreme we have our Spreadsheet Guru.
The Spreadsheet Guru thinks he can “solve” Football Index through numbers alone.
He’s very diligent and often excellent at spotting a good player coming through. The best ones know what the relevant stats are and can build a picture of likely strong performance player before they start racking up big scores on FI and everyone becomes aware.
Others who are not so good see great secondary stats like a high number of passes, interceptions or dribbles but miss vital details or can’t quite grasp the wide range of things you need to come together to create a consistent performance winner.
But because he is high effort, he will tend to have a decent idea of which players are good for dividends and which aren’t.
He will still likely end up frustrated though if he tries to trade using stats alone.
Because Capital Appreciation Guy who thinks spreadsheets are just for nerds may be lazy but he has a point here – the trend fit does matter. And even if you are digging up hidden gems in your spreadsheet, it might not count for very much if nobody wants to buy them even if they win.
This is perhaps why Football Index is so interesting and compelling. There are dozens of soft factors like age, transfer prospects, personality, media presence that all must be factored in.
Unlike Fantasy Football, you can’t find all of the answers in a spreadsheet no matter how beautifully colour coded it is.
And then we have the “dividend collector”. He is stereotypically a large portfolio holder who sits large chunks of money in the top 10 or 20 most expensive players.
He’ll bang on about how “reinvesting dividends” is the key to growth and issue long explanations of the benefits of compounding. That’s all true but it fundamentally ignores the fact that capital appreciation compounds gains in exactly the same way except (currently) much faster.
All gains grow your pot for reinvestment no matter where they come from.
He can be quite passive and needs neither good research skills or a mastery of the trends to succeed in the current market.
He is dealing largely with very well known players many of whom aren’t going anywhere soon. He has some difficulties to deal with like Neymar or Pogba’s latest drama but much of the time he’s probably very loyal to his selections.
Because FI is growing nicely and he has a large portfolio, perhaps six figures or more, his raw £ gains will be extremely impressive. But as a % they will be relatively weak because he is largely ignoring the strong capital appreciation available at the budget and mid-range of the market.
He’ll keep doing reasonably well as long as FI does, but his % gains will be a fraction of what they could be.
Who is right?
These are three extreme examples of traders. Most people are probably a little bit more balanced, or at least I’d hope so! All of them have strengths and weaknesses.
All of them will probably still have done reasonably well in what has been a very young and forgiving market. But, as FI matures it will get harder and weaknesses will start to get exposed.
The point is to highlight the nonsense in debating which if any of these methods are best. They are all weak. With the possible exception of the dividend collector which is absolutely fine if you are lucky enough to have that much money and not a lot of time!
Capital appreciation vs dividends is a false choice. And ignoring the fundamental win mechanics of the game by pretending dividends aren’t important is foolish no matter what type of trader you are.
I make the vast majority of my profits from rapid Capital Appreciation. And I do it predominantly by finding future dividend winners through good research.
Dividends and Capital Appreciation are fundamentally linked.
Dividends are a small proportion of my profits. By the time the player is winning regularly and the hype has built I will likely have taken profits and moved on to another target.
But I know that dividends are absolutely critical. The actual win mechanics of the game and the resulting dividends 100% matter.
They matter because they drive prices. How did Kai Havertz, a relative unknown under £1, become Kai Havertz, £4 midfielder? He did it by putting up big performance scores again and again whilst having a decent trend fit.
He gets support from all competing forces of the market. Capital Appreciation Guy, Spreadsheet Guy and Dividend Collector all see reasons to buy Kai Havertz and that’s why he has not just rocketed to a high price but he has kept it too.
A player with a similar trend fit to Havertz but without the quality will get support from trend obsessed Capital Appreciation Guy, but good luck selling him to the diligent Spreadsheet Guru who knows he is a weak performance player. Or the Dividend Collector who hasn’t seen evidence of consistent potential returns.
Similarly, a player with Kai Havertz’ quality but without his trend fit may get interest from Spreadsheet Guru but Capital Appreciation guy and Dividend Collector aren’t interested.
If a player has lots of support but only from one “type” of trader (i.e they are pulling a Kai Havertz level price but without the quality) that price is going to be brittle and vulnerable to a drop if something goes wrong. Your typical hype trader is not known for their loyalty.
The players who rise the most will be the ones who get support from all kinds of traders. But finding such players before most other people do is not easy at all. It takes a lot of skill and effort.
So who is the "best" type of trader?
The best traders don’t make these false choices.
They understand the trends and respect them, even when they are crazy.
But they are diligent researchers too who gather the knowledge they need to make good decisions about quality vs value.
To pretend you don’t need to know which players have real quality is, in my view, just lazy.
And it’s naive to think you can navigate FI just using a spreadsheet, you have to understand the market and it’s trends too.
It’s this killer combination of strong trend knowledge and understanding of the direction of the market backed up by diligent and high quality research that breeds consistent success.
Whilst I will often take advantage of a strong trend, even if I think it’s a little bit silly, I always make sure I do not stray too far from the fundamental win mechanics of the game.
Dividends and the potential to win dividends is, after all, the only thing that gives any player on FI real value.
Without dividends, we would be buying nothing more than entries in a fictional spreadsheet.
There are tons of good reasons to stay in touch with the real win mechanics and you will find doing so brings you “luck”.
If the market ever went through a down turn and quality was really tested, it would be the players who are backed up by real substance that ride out the storm the best.
And, you tend to find that you will be well placed to take advantage of key FI announcements when they come.
For example, when and if there is a dividend increase, it is the expected dividend returners who increase in value first.
And at other occasional events like the performance scoring changes, it is generally players with real quality and potential to win the actual game that get the attention.
Whilst trends can come and go, there will always be reasons why attention gets dragged back to the real win mechanics of the game.