Will the odds predict the winner?

Football stadium. Will the odds predict the winner?

Don’t bet on England winning the Euros!

“It is difficult to make predictions, especially about the future.” Yogi Berra

The UEFA EURO 2024 European football championship has kicked off. Like millions of football fans, we will be looking forward to an entertaining tournament, some exciting games and, hopefully, a successful outcome for our team.

Of course, we all hope for the win, but what about our reasonable expectations? Can we take comfort from England’s current position as pretournament favourite, based on the odds at least?

Probably not.

England supporters have suffered through too many years when our dreams of success have foundered on the reef of yet another penalty shoot-out.

But aside from the history of England’s performances in the knockout stages of major championships, should we be pessimistic about the pretournament odds having any predictive power as to the eventual winner?

Will the odds predict the winner?

To answer the question, we ran a simple experiment where we looked at the last five European championships and compared the teams’ finishing positions with their pretournament betting odds.

Unsurprisingly, we found that it is indeed difficult to predict winners ahead of time. Of the five tournaments, there was only one year when the bookies’ favourite ultimately triumphed. It was Spain in 2012.

This is no surprise to us in the investment world, where the parallels are blindingly obvious.

Decades of empirical observations and academic studies have shown that trying to pick winners ahead of time, whether individual stocks or star fund managers, has a very low chance of success.

However, there was another lesson to be drawn.

We expanded the study to look at how well the pretournament winner odds predicted the makeup of the last eight, the quarter finalists, and here, the predictions were much more accurate.

In fact, of the 40 quarter final places available between 2004–2020, the pretournament predictions got 27, or 68% of them, correct.

It seems that the market does a better job of weighing the characteristics of teams that are more likely to win than it does of picking eventual winners, given the amount of noise and randomness that can occur in individual games.

Here again, there are lessons that we can take into the investment world.

What we can predict

We believe that there is information in market prices that allows us to identify the subgroups of stocks in the equity market that have an elevated probability of winning, or more specifically, have higher expected returns.

We are not trying to predict whether an individual stock will be a winner. Rather, we are looking at how the characteristics of stocks sorted by their size, their relative price, or their profitability can tell us something about their collective performance over the longer term. And this is what we see in the data: The intuition and the theory are supported by the evidence.

Whether or not your team wins the final on Sunday 14th July, we hope that you enjoy the beautiful game for what it is, a game. But if you were interested in a bet, then perhaps the best tip we can offer, based on this analysis, is: England to make the last eight.

Thank you to David Jones – Head of UK and Ireland Advisor Group at Dimensional Fund Advisors for the basis of this article.

If you have any questions relating to your investments, please get in touch on 01825 76 33 66 or via the form below.

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.