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Introduction

Golf: I've been doing a lot of golfing lately and can't help but recognize the undeniable correlation between people that have tons of money and certain sports that they're usually into. You know, "white collar" sports like sailing, golf, yachting, polo, tennis, etc.

Anyway, every day in my affluent, yet podunk Midwestern waterside community in which I reside, I routinely bump into your average, middle-aged, milquetoast man with tons of money. He's everywhere, and money is protruding out of his every orifice. I see this man all day and all night; from the time I head to the local coffee shop to get my morning brew to the time I head to the local restaurant at night to get my evening (slightly different type of) brew.

Investing: Once in a while, usually after the third martini, I'll occasionally try and strike up a conversation about finance or the market with this guy when I see him out. What I've found lately has been consistent with what I've found for the past few years: there are tons of people out there with tons of money and no idea what to do with it. Not only that, they have precisely zero idea as to how finance and the markets work in general. As I've pointed out in a couple of previous articles, there is a massive sect of individuals in the world that either have:

  • more money than they can possibly manage
  • not enough time to actively manage their own money
  • the personal money management IQ of one (1) stalk of organic, California grown celery

Years ago, when I was working in the field of technology, one of the biggest tricks of the trade you could pick up was the ability to relay technical "jargon" to people that didn't particularly understand it. One of the great tools that I used was analogies. Into cars? Let me explain how a computer is built like a car. Into construction? Let me explain how the internet works through construction analogies.

In that vein, I'm using golf as my medium here to get to the rich, golf-playing, clueless men of my (and many other) communities. So, how have you been shooting? Par for the course these past years has shown great yields as the S&P and Dow are at all time highs. I want to take you to five under, so you can beat the market and beat the course. Here's three golf lessons that you can carry over into the finance world.

1. Pick and Choose Your Instruments Wisely

Golf : In golf, club selection is an extremely important part of the game. Sometimes, there's easy choices: you wouldn't use a wedge to tee off, nor would you use a putter for a 95 yard chip in. As you progress through the course, meeting different challenges on each hole, you find yourself in endless numbers of varying situations.

Aside from the easy choices, there's also difficult choices of the same type to make. If you're on the fringe 60 yards from the hole and have the choice to chip or putt, which do you choose? If the wind's coming at you at 15 mph, stick with the sand wedge or club up to the pitching wedge? There's conservative choices, that keep you on the fairway but add another stroke; and there's risky choices that could get you that occasional eagle, but might cost you strokes in the long run.

Investing : Like clubs in your golf bag, there are an endless amount of financial instruments at our disposal for multiples uses, depending on exactly what it is that we want to do with our money. Want to preserve your money and lock in small interest? CD's, bonds, or treasuries may be for you. Want to bet small but swing for the fences on a "sure thing"? Why not load up on out of the money options?

From risk-adverse to highest yielding, a few of these include: treasury bills/bonds, exchange traded funds/index funds, REITs, stocks (large, mid, small & micro-cap), options, and exotic options. Just as it is important to know the feel of each club and how it reacts to your swing, it's important that you take time to learn about different financial instruments and their properties when it comes to investing, Investopedia.com is a great place to start.

2. Keep Your Eyes Open For Signs and Surroundings

Golf : Think about this: you're on the 10th hole, having the hole of your life. It's a par 5 and you've made it onto the green in an astounding two strokes. You're about 15 yards from the pin - a tricky putt nonetheless, but not so far that you haven't made one from this distance before. You line up your shot, grab your trusty putter, take your stance, create a pendulum with your arms, take a massive deep breath, pull your swing back and ...

... plop! Someone else's ball falls in the middle of the green, distracting and surprising you to the point where you choke on your Juicy Fruit brand chewing gum and, while making strange throat noises, swing wildly at the ball, knocking it deep into the rough, where a nearby grazing goose mistakes it for food, picks it up, swallows it, and flies away.

You just went from having potentially the best hole in your life, to a two stroke penalty and a drop. What the hell just happened?

What's the lesson, you ask? Keep your head up and your eyes open. Be aware your surroundings and the things that you can see coming. A quick glance of your surroundings and you'd know that other golfers were way too close, but alas, you were "in the zone".

"Sure", you'll argue with me, "but I would just take a mulligan if that happened on the course!"

I knew you were going to say that, and luckily for me, this is my article so we're playing by my rules. What you failed to realize was that throughout the first nine other holes, you were playing so poorly due to the half thirty rack of Coors Light you've ingested since "warm up on the driving range" (read: funneling beers with your golf buddies in the parking lot), that your rich friend Prescott (with whom you have a bet AND who is the designated score keeper for the day) fails to grant you another mulligan.

Investing : In finance, these situations happen as well. Also, in finance, unless you hedge correctly, there are generally no mulligans [unless you're AIG (NYSE:AIG) or the auto industry]. If you can pay attention to your surroundings, you can sometimes also find signs that will dictate the correct investing move for you.

In my previous article, "My Definitive 17 Cardinal Rules for Investing Success", I have a section dedicated to paying attention to signs and surroundings. In that article, I offer up the following commentary on signs that I saw with both Celsion (NASDAQ:CLSN) and Knight Capital Group (NYSE:KCG):

In regards to Celsion, I spoke about how ahead of a binary event, I watched what appeared to be a massive sell-off and ignored my instincts, remaining long. It cost me. I commented:

A 900k share order goes off at market, destroying the bid and causing a halt. Could this have been someone wanting to make their exit quickly? With the pending class action investigation now taking place, I'd be interested to see the results of a full investigation of when the company actually had the data in hand in comparison to the analyst downgrades and "bear raid". I hate that I'm even writing that, as someone who truly believes in the integrity of the company and executives; and their mission. But sometimes, if it walks like a duck and talks like a duck...again, "there are no coincidences".

On Knight, I commented about the day of their fund-crippling algorithm error:

I knew something was wrong at Knight Capital the day of their algorithm error, because the stock was getting crushed down to $9 on massive volume almost an hour before the story ever even hit the newswire. After investing long enough, I've started to learn, "there are no coincidences". I was able to trade the Knight disaster accordingly just by watching the volume. I took my short position, they released the news, the rest is history. The pre-news trading tipped me off. If you don't think there were insiders that dumped into that news, then I have some real estate in rural Alaska to sell you.

As I state above, these were two massive signs; one I followed and made some substantial money, one I ignored and lost money on. The market is chaos, this is true, but there is a cause and an effect to everything that happens in the stock market. Pay attention to these "coincidences" and follow in the direction they lead you.

Be aware of your surroundings and keep your head in the game, with both golf and finance. Having vision and instincts will fare you well in both.

3. Reaction is the Key to Things You Can't Control

Golf: When you're out on the golf course, there's certain things you have zero control over: the weather, the wind, poorly maintained course conditions, and (most importantly) the frequency in which the drink cart drives by.

But, you can react - and that's a lot of what a good golf game is about. When the wind picks up towards you, you know you may have to club up; when the green looks slower than usual, you know you have to put a bit more into your putt swing; and most importantly, if you're not sure that the drink cart is going to make it around again before the 18th hole, you better buy whatever they have left at whatever the cost.

Investing: In finance, there's tons of variables that you have absolutely no control over. Most notably out of these are the global markets, global economies, and all major news and financial news. However, there's never been a better time for traders to be able to react to things they can't control than now. There are a seemingly endless number of ETFs, funds and derivatives that allow you to basically bet on absolutely anything, from volatility (NYSEARCA:VXX) to how things are going over there in friendly Belgium (NYSEARCA:EWK).

I started to touch on this in a previous article, when I said:

As an investor, you need to be on top of what's happening with your positions every single day. Ever look at a trading desk picture and think that 15 monitors is a bit overdone? It's not. There's infinite sources of news and analysis on the positions you hold, and your job is to let that information all permeate your head on a daily basis. Know what your company's chart looks like, know the latest SEC filings inside and out. Know what their latest press release was, what their average volume is, and how they're trading in relation to all of that right now.

Know that as you sleep, things are taking place overseas that are going to shape the way that your investments react the following day. In other words, keep your mind on your money and your money on your mind.

So, what's the point I'm trying to make? Let me give you an example. You're long McDonald's (NYSE:MCD) a good portion of your portfolio - a great dividend payer and all around great yielding stock.

You're channel surfing at 3 in the morning with potato chip crumbs trailing off your shirt and eyes half closed when you notice, on CNN, that Kim Jong Un has been inadvertently photographed overnight by North Korean media eating one of his favorites, a Filet-o-Fish. This particular Filet-o-Fish is clearly marked and branded on the box he is holding in the hand he is not using to hoist the delicious fish sandwich into his mouth. There's essentially zero way to convince any person, including blind people, that the particular fish sandwich this dictator is eating is not a McDonald's brand product.

That's an event you have absolutely no control over, however, you can react to. First thing in the morning you sell off a 10% portion of your position in McDonald's and insure the rest with some cheap put options. Eventually, the photo makes its rounds through U.S. media that day, and McDonald's is slammed with complaints and sheds 5% in a quick, irrational panic. The picture is featured on the front page of CNBC.com with the caption, "McDonald's Linked to North Korea Tensions". Money hungry contributors on blog sites rush to write analysis of the situation and Jim Cramer (after his fund loads puts) comes on TV claiming that McDonald's has terrorist ties. Citron Research publishes a piece claiming the same.

Your puts kick in and your newfound dry powder allows you to take swift advantage of the meaningless panic drop as you scoop up more MCD at a 5% discount to market. The next day, when Beyonce is photographed eating the same Filet-o-Fish, McDonald resumes trading at its pre-Kim Jong Un levels.

It's all about taking things that you can't control, and reacting accordingly.

Conclusion

So, my task going into this article was to find and pinpoint three golf rules that can also be applied to finance in hopes of milquetoast rich golfing men worldwide getting a bit firmer of a grasp on finance, eventually using these tools to make billions, then seeking me out and giving me a 10% cut of their life's worth. Is it working yet?

As always, best of luck to all investors.

Source: 3 Golf Lessons You Can Use For Your Portfolio