What do F1 and investing have in common?
By Alexander Joshi, Head of Behavioural Finance, Barclays Private Bank
In the following article, I’m going to explain why the core principles needed to build a successful F1 car could arguably also apply to building a successful investment portfolio.
Why? Partly because I’m a self-confessed F1 fan, but also because I find that the ability to make parallels between investing and ‘real life’ topics, can help investors to better understand how their portfolio is set-up.
If you’re new to Formula 1, I’ll quickly paint the picture – put simply, it’s the pinnacle of motorsport. Since launching in 1950, teams have competed on a variety of tracks all over the world, striving to have the best car over the course of a season. And it’s a multi-million-pound industry, requiring huge investment to participate, and paying out huge rewards to those who succeed.
One of the more obvious parallels with investing comes via the desire to maximise potential and minimise risk. F1 engineers strive to give their drivers a competitive edge, and attention to detail can be the difference between success and failure. In some cases, they’re fighting to achieve a competitive edge as small as thousandths of a second.
As with investing, technical expertise, and the ability to perform in the face of changing conditions, can add significant value.
A second parallel between the two worlds arguably lies in the form of decision-making. For successful investors and F1 teams alike, strategic decision-making is vital.
While all F1 teams aim to be fastest, it’s true to say that speed isn’t their only focus. The F1 season involves racing cars in different venues all over the world, with engineers fine-tuning vehicles to reflect the varying track and weather conditions.
That’s not dissimilar to portfolio management, where a well-built portfolio holds several types of asset class, as well as exposures to a range of sectors and regions. While some asset classes will perform well in some conditions, they may perform poorly in others. By holding a mix of asset classes, a portfolio therefore has an improved chance of delivering consistent, positive returns across market cycles.
The point here being that good decision-making requires skill and can make a positive difference in the pursuit of exceptional performance.
The role of optimisation
For multi-asset portfolios, the long-term investment strategy is key but a degree of optimisation is still needed to keep them as resilient and rewarding as possible. The same is true for F1 cars during a championship season.
While the base concept for an F1 car will be scoped out long before a season starts, adjustments will be made to the engine and bodywork, as and when the engineers see fit.
To give you an example, the rear wing of an F1 car helps to manage something called ‘downforce’ during races. It keeps the vehicles firmly on the track and can improve speed while turning through corners. That said, tweak the rear wing too much, and the engineers risk increasing aerodynamic drag, which can slow their team’s car down.
Likewise with investing, managers of a portfolio can make short-term tactical tweaks to holdings, – either to capitalise on opportunity, and/or to reduce risk. They remain focused on their long-term strategy, also known as the strategic asset allocation or SAA, but attempt to augment it via short-term tweaks, also known as the tactical asset allocation.
Now we get to an area close to my heart – the subject of behavioural biases.
For investors, the value of a long-term strategy is well-documented. When markets are in rude health, or conversely experiencing volatility, our biases – essentially, the systemic deviations from rationality – can be exacerbated. And when this happens, investors risk making sub-optimal decisions. As an example, the stress of a short-term market downturn might compel some investors to sell, which might cost them later when markets recover.
Likewise with F1, a driver might make an error when under pressure from a competitor. To better shield against this cognitive risk, delegating decision-making to experts with tried and tested processes, could help. And in the world of F1, delegation and trust are non-negotiable factors given the complexity and speed of decision-making required.
Staying on track
Similarly, events out of a racing team’s control – such as new regulatory changes brought in at the start of each season to either improve safety or reduce the performance gaps between teams – can also lead to periods of underperformance, as the once-dominant teams find themselves struggling to keep up in the new era.
It’s the same for investors, who periodically have to deal with unexpected political crises, wars or even natural disasters, causing a ripple effect of negativity on other financial markets around the world.
Nevertheless, it’s important to recognise at these moments there will be periods of underperformance. It’s part and parcel of both the racing and investing journey. And if you have sound processes in place, then it’s worth sticking to these plans – not making drastic changes to either the F1 car or your investment portfolio – and having the composure to keep calm and remain focused on long-term goals, to try to get back to the front of the race.
Knee-jerk reactions are only ever likely to hurt in the long run – putting racing teams and investors alike further down the starting grid.
As I mentioned earlier, F1 is all about fine margins. Small engineering tweaks can make all the difference, as can skilful people and staying calm under pressure.
It’s the same for pit stops, where racing teams quantify and analyse everything to win. Pit stops are one of the most important moments, and everything is planned and practised to the millisecond.
Over time, these marginal gains can compound, helping to boost growth. There will always be risk and bumps along the way. But maintaining a long-term focus, calling on expertise and remaining calm under pressure, can collectively make a positive difference. That’s as true for investors as it is for F1 drivers.