Disclaimer: Despite the headlines this blog is not your usual piece of transfer bollocks. You have been warned.
It may be news to young football fans but the modern transfer market is barely 13 years old when the transfer window was first introduced to English football by FIFA in 2003/04. Yes, the concept of a football transfer existed in England for more than 100 years when the Football Association (FA) introduced player registration sometime after 1885. But for most of the intervening years there was really no “free” market for the services of a footballer. It is a historical fact that sometime after the Football League was formed in 1888, the owners decided that restrictions had to be placed on the ability of richer clubs to lure players from other clubs to prevent the league being dominated by a handful of clubs. From the start of the 1893–94 season onwards, once a player was registered with a Football League club, they could not be registered with any other club, even in subsequent seasons, without the permission of the club he was registered with.
The transfer system remained unchanged until the Bosman ruling in 1995. The case for ending Football League-type restrictions on player transfers was brought to court by Jean-Marc Bosman, a former Belgian footballer who in 1990 was registered with Belgian club RFC Liège. His contract had expired and he was looking to move to French team Dunkerque, but Dunkerque refused to pay the transfer fee of £500,000 that Liège were asking for. Bosman was left in limbo and his wages were cut by 75% due to him not playing. After a lengthy legal battle, he won his case when the European Court of Justice ruled that players should legally be free to move when their contract expired.
The point of the preceding historical overview is to remind my readers that the existence of a transfer market and the window is a very recent phenomenon with little in the way of repetitive historical data on which to establish some trading rules. Complicating things even further is the current transfer market does not function year-round. Trading is artificially restricted to the transfer window; i.e. two months in summer and one month in winter. No wonder there are such huge distortions in the demand and supply mechanism and ultimately in prices.
Despite the relative youth of the transfer market, it is important for us Arsenal fans and others to understand its driving forces to avoid being manipulated by the various market participants as well as to better understand the moves made by Arsene and the club. In my last blog I shared with you the role of Greed and Despair as the two primary emotional drivers in the stock market which are equally evident during the transfer window. I emphasized that in in both markets the full-time professionals will consistently exploit and profit from these emotions.
Why the stock market as a frame of reference? Because it is the oldest and biggest market place in the world where the public (individuals, speculators, investors, and institutions) compete to make money. Stock trading of some sort has been around since the middle of the 16th century. But the modern stock exchange was first officially formed in London in 1773, 19 years before the New York Stock Exchange which eventually became the pre-eminent stock market by the 19th century paralleling the rise of New York as the centre of world commerce and finance. Despite repetitive bubbles and crashes, malfeasance and scandals, stock markets continue to exist and grow in size. At the close of 2012, the size of the world stock market (total market capitalization) was about US$55 trillion. By country, the largest market was the United States (about 34%), followed by Japan (about 6%) and the United Kingdom (about 6%).
Due to their long history as well as the money at stake, stock markets have been studied to death by academics and professionals aiming to identify trends and behaviours which are repetitive and predictable. One such repetitive feature that is absolutely comparable to the transfer market is the irrational behaviour by many of the participants. Many of you may recall in the late nineties the mantra of “irrational exuberance” by former U.S. Federal Reserve chairman, Alan Greenspan to describe the behaviour of investors running up stock prices during the dot.com bubble which eventually went splat.
It seems to me the very definition of irrational behaviour is Manchester United’s who sold Pogba to Juventus for £500k and four years later repurchased him for an eye watering £89.25m according to TransferMkt.com. As the highest valued transfer ever by United, it is reasonable to assume that during his five year contract he will be earning top wages at United, at least comparable with the £300k per week reportedly earned by Rooney. Added to this expensive acquisition are the transfers of Mkhitarayan (£35.7m) and Bailly (£32.3m) with wages to match. Ibrahimovic was acquire on a free but nobody doubts that he is earning top whack given his celebrity status worldwide.
Meanwhile their noisy neighbours City refuse to be outdone, splashing lavishly on Stones (£47.3m), Sane (£42.5m), Gabriel Jesus (£27.2m), Gündogan (£22.9m), Bravo (£15.3m), Nolito (£15.3m) and a few more in single digits. It is commonly known that City pay top-top wages in the league and apparently out of favour players like Yaya Toure, Samir Nasri and Eliaquim Mangala are difficult to move on because interested clubs cannot match their contractual compensation. This is a prime example of a club obligated to pay premium salaries of once big signings now surplus to requirements.
It is widely known that contrarians will constantly outperform the prevailing market sentiment during market extremes. In our case during the transfer window Arsene Wenger consistently exploits and profits from the irrational behavior of City, United, Chelsea, Liverpool, Spurs et al. This is despite thousands of mainstream media articles, blogs and tweets that Arsenal is being left behind. Arsene refuses to buy high and sell low. He waits until the opportunity develops to get superior value at relatively lower market prices than his competitors. Once the timing is right, usually towards the end of the window, he moves in for the kill (Cazorla, Alexis and now Lucas Perez come to mind).
Herzfeld and Drach (“H and D”) in High-Return, Low-Risk Investment explains that the reason for this irrational behaviour goes much deeper than people reacting to extremes (e.g. when Arsenal go on a bad run) or to the media brainwashing us to believe that transfers are the key to success (when there is ample evidence to the contrary). I will briefly touch on these underlying reasons in the hope that it may help us cope with the repetitive nonsense that prevails during the transfer window.
1. Psychological Gratification
People like to be liked. Being with the crowd is much easier psychologically than being against If everyone is doing the same thing, there is a feeling of camaraderie. (I experience this on Twitter everyday. If the big accounts are slagging Wenger for “dithering” in the transfer market then it is par for the course for the vast majority while those of us who decry the nonsense and point to Wenger’s consistent 20-year success in the window are treated as lepers). This bonding however reduces clear recognition of the risks inherent in the crowd’s behaviour, leading to major losses when crowds ignore reality. Crowd followers are lemmings. Buying and selling players in the transfer market is not a team sport; there are winners and losers with millions at stake.
2. Short-Term Illusion
When a dramatic price event occurs and becomes the centre of attention, seemingly logical reason to justify the price change accompany the sensationalism. The reasoning baits the trap. Usually a major price move has occurred before the sensationalism , the move itself created the sensationalism. The end result is monies are attracted (through supply/demand) to aggravate the price change. If the price move is up, the sensationalism will attract buyers (demand) and push prices higher. If the price move is down, the sensationalism will attract sellers (supply) and push prices lower. H and D note that anyone with experience with the investing public knows that those who get involved with after-the-fact sensationalism tend to repeat their behaviour even though they repeatedly lose (Man United I am looking at you).
Translate the above to the transfer market: The tendency at the beginning of the window is to push prices higher. The big monied teams like PSG, Barca, and Madrid usually storm out of the blocks in their greed to get the best asset on the market. The media and blogs sensationally justify the high prices as the going “market rate” with no reference to quality (e.g. see most of the recent blogs by the Sage of Dublin). There is the usual round of sensational media reports in England and from Europe justifying higher prices and United, City, Chelsea are lured in to pay hand-over-fist for less than top-top quality players. In a year or two many of these high priced transfers prove to be a bust. Meanwhile a measured long-term player like Arsenal will wait until the end of the window to pick up usually young, promising talent on the cheap at reasonable prices whom it can develop as world class players. Fabregas, Van Persie are examples and it is likely Bellerin and Gnabry will follow this route. Just as an aside, in my opinion, if Diaby did not suffer that horrific assault on his ankles in that last game of his first year he would have been a great-great player in the class of Fabregas and Van Persie.
3. Justified sensationalism
H and D note that automatically ignoring (or taking positions directly opposite) prevailing sensationalism can be a mistake. There are positions when the sensationalism is correct, the price movement is justified and the price direction is very likely to continue. Thus in 2007-2008 when the run on Lehman Brothers became apparent and Bear Sterns was being shut down and investors began to bail from firms holding dodgy mortgages and mortgage-backed securities. It would have been right to go with the flow. The important thing is to use common sense to differentiate between justified and unjustified sensationalism. The easiest example in the last ten years of unjustified sensationalism has been the yearly pre-season prognostications by the vast majority of pundits in the commercial media that Arsenal will fall out of the top-four because it failed to spend like its big rivals. They consistently fail to educate the public that Arsenal is a self-sustaining club that could never match United or the sugar-daddy clubs in spending, it would simply go bankrupt. Similarly they consistently under report the role of Arsene Wenger as a genius of a manager who despite lesser resources has consistently outperformed his big spending rivals.
Playing a Blinder
I am going to take the unusual role of saying the club has recognized an element of justifiable sensationalism among the fans this summer and responded by playing this transfer window brilliantly. They, I am sure, are keenly aware of the desire of the supporters to see the club actually compete for the title, knowing full well that finishing 10 points behind Leicester last year has left embers of discontent that can be easily become a conflagration in the hands of the usual pyromaniacs. The early acquisition of Xhaka and Holding as well as the bid for Vardy was a signal of serious intent. As Wenger said early in the window we need to score some more goals and defend even better. As I write the acquisition of Mustafi and Lucas Perez is all but finalized.
In my opinion Lucas could be the final piece of the puzzle; an experienced, aggressive, speedy forward who can score goals and assist. The last time Wenger brought such a predator was in 2007 with the acquisition of Eduardo from Shakhtar Donetsk who was then described as a “striker with lightning speed and a poacher’s instinct in front of goal.” Dudu only scored 12 goals from 22 starts in his first season at the Arsenal, eight of them in the PL, but he was starting to flourish amid the hustle and bustle of English football until Martin “Tiny” Taylor’s challenge left him with a broken leg and dislocated ankle. Up to that point in time, together with Adebayor leading the line, we were on a title-winning run, 5 points atop the table. If Lucas, in his first season, can in anyway duplicate Eduardo’s performances, he together with Walcott, Sanchez and Giroud being fed by Ozil and Xakha, could help us score the goals badly needed during the harsh winter months, when title challenges are made or broken. If he does, we could be in with a shout by the beginning of May.
In closing, I thought Arsene and Ivan would have executed their transfer strategy down to the wire. Instead our summer business is done and dusted by August 29th. Too bad for Sky, BT, ESPN and the BBC, the sensationalists. Leave it to our friend Mel to express my sentiments in his inimitable style: