(This essay first appeared in Founding Fuel Life)
In one of his recent memos, Howard Marks, co-founder of Oaktree Capital Management, writes,
Investing strikes me as being very much like golf, where playing conditions and the performance of competitors can change from day to day, as can the placement of the holes. On some days, one approach to the course is appropriate, but on other days, different tactics are called for.
I wholeheartedly agree with this analogy, having experienced it first hand. My initiation into golf happened just a few years back and I can vouch that playing this game can indeed make one a better risk-taker. (I play off a handicap of 12, which is intermediate level)
If you think that golf is a game for rich people to hobnob and network, you are seriously mistaken. It is a competitive sport that is a lot of fun and one that you can play till your late 70s. Try your hand at it. Walk up to your local golf club and ask to hit some balls. And in the process you may even become a better investor!
Golf is much like markets
Unlike most sports, golf is played with a stationary ball. You play a shot, walk up to the ball and hit the next shot as the ball lies still. You can take all the time to hit your shot. The golf course is littered with hazards — water bodies, sand traps, thick grass. The same golf course plays differently every day depending upon the wind, or rains. And finally, there is no opponent — each player plays against the golf course.
At some abstraction, this is the familiar setting of the markets. Investors do not compete directly with each other; each investor plays the game against unknown participants. The marketplace is replete with risks and opportunities and the investor has to weigh his moves carefully.
These are some of my learnings in risk-taking from the game of golf:
Get the basics right early on
On the practice range, you can easily tell the hacker golfer. They have a swing and posture which is highly ineffective. They may love the game but they cannot play three decent shots in succession.
The golf swing is a very counter-intuitive movement. The golfer is supposed to use their torso and not their arms to generate the power. One can try learning this on their own with the aid of YouTube videos, or go to a coach.
Considering that an average golfer will play to the age of 75, it is a wise idea to get the basics right early on. This will need spending time and money on a good coach.
Ditto with investing. An average investor will most likely keep playing the investing game till the end of their life. In that case why handicap oneself and play the game without getting some education and learning? Instead of relying on tips and second-hand information, it will pay enormously to read a few books, or else engage the services of an advisor or wealth manager.
Don’t be the investor who would love to make money, but keeps hacking away.
Have a routine
Visualise Nadal every time he serves. He places his hair behind his ear, pulls his nose and adjusts his shorts while bouncing the ball. This is his pre-shot routine.
Similarly, every good golfer has a set pre-shot routine. This is any sequence of things (idiosyncratic) that the golfer does before hitting a shot. Whether it be a weekend game with friends, or an important shot in a tournament, the golfer will go through the same routine before hitting a shot.
A pre-shot routine becomes critical in all games which are not instinctive but contemplative. This likely happens because the ball is stationary.
It is the same with investing. The narrative of the market is unique every day; there is always a story. When contemplating a decision during volatile times, the uniqueness of events naturally weighs on the investor’s mind, making the decision seem extra important.
A set routine helps the investor in this situation. This could be a checklist before buying or selling. Going through a familiar check-list prevents the uniqueness of the situation affecting the investor’s mind disproportionately, and instead calms him so he can see the current situation as just another trivial situation.
Focusing our mind away from the importance of a situation often helps us make better decisions.
There is a time for offence and for defence
Golf courses the world over are built by sadists to trap golfers’ balls. They have a liberal presence of water bodies, sand bunkers, trees, bushes and impediments of various kinds.
Good golfers have a default game plan for each hole — where are they going to play their shots, what chances can be taken, etc. This is called course management.
However, the player is ready to tweak this default strategy depending upon the weather conditions and requirements of play. If there is too much of head-wind, their usual shot may not carry over the water body to the flag. In this case, he will decide to go to green in two shots, the first shot being a half shot short of the water. This is called laying-up, a conservative play that results from the admission of the adverse situation.
All investors have their own personal style and risk taking profile. However, depending upon changes in the marketplace, the smart investors can switch gears. A market with stocks on fire everyday calls for the investor to change their stance to cautious and take some money off the table. Conversely, when stocks are trading at lows because of a market crisis, it is time to buck the consensus safe play and go on the offensive (“back up the truck and buy” – WB).
Investors cannot have one style all the time. They must be defensive most of the time and go on the offensive when opportunity presents itself (this will invariably be contrary to the crowd).
The difference between the good and not-so-good golfers at club level is the anxiety and apprehension that the latter have before hitting every shot. You can see their body going tense as their mind is already anticipating the different outcomes. They are handicapping themselves by focusing on the result.
Better golfers assess the situation and decide on what club and distance to hit before even stepping up to the ball. Their deliberate mind forms the tactical requirements and voices it to the body and muscles. Once they step up to the ball, they get into the familiar drill of the pre-shot routine. From here on, there is no room for the deliberate mind. The muscles and the intuitive self (Kahneman’s System 1) are in absolute control till the shot is made.
The relegation of the deliberate mind means that there is complete acceptance of the outcome. The golfer is said to play freely when not worrying about the results.
Imagine a volatile market presenting lucrative opportunities by way of low prices. Our investor has done his homework and is ready with a list of stocks to buy. However, at the time of calling the broker or making the actual trade, the deliberate self is bound to throw up last minute apprehensions. This leads to analysis-paralysis and the opportunity passes.
If the investor has done the ground-work properly, he must execute freely without unduly worrying about the consequences.
Enjoy the game
No golfer can expect to play great every day. Some rounds are extremely good, while some days are so atrocious that the golfer is ready to quit the game.
The insight that one gains from the more experienced (and older) golfers is that getting to play the game is its own reward. The walk in lush green surroundings, company of friends and the banter. The winners are not those that play extremely well one day, but those who can continue playing the game for much of their lives.
One of the most fascinating things about golf is how it reflects the cycle of life. No matter what you shoot — the next day you have to go back to the first tee and begin all over again.
Like the golfer, every investor is bound to have good and bad days. However, it is important to remember that investing is an infinite game without any end. Even if you have a windfall one day, you still have to keep playing the game. But a large loss can take the investor out of the game, permanently.
If you like the game of investing, let your mantra be to first survive with average returns. In a few decades, you are likely to be far wealthier than today, and guaranteed to have had a great time playing the game.