Investing Is Not A Game Of Perfect

Includes: DIA, IWM, QQQ, SPY
by: David Van Knapp


Train yourself and then trust yourself.

Ignore the noise.

Stick to your plan.

Dr. Bob Rotella first published Golf Is Not a Game of Perfect in 1995. In my opinion, it is one of the best golf books ever written.

The funny thing is, it contains hardly a word about how to swing a club, chip onto the green, or putt. Instead it is about the psychology of playing golf to the best of your abilities.

I also think that the book is one of the best investing books ever. Obviously, it contains nothing about actually investing. But the psychology of being a good investor and being a good golfer have many similarities. I would like to talk about a few.

All quotes are from the book.

Train It and Trust It

To me, the act of striking a golf ball belongs in that category of sports events in which the player need not react to what another player does….Major variables are constant and under the golfer's control.

To me, the important investing lesson in the passage above is "need not react to what another player does."

In investing, the other players are legion. There is not only the market itself, but also prognosticators, pundits, naysayers, CNBC, Bloomberg, and Wall St. advertisers on every media platform. Add it all up, and you get a barrage of information 24x7 about how to play the investing game.

The foremost danger in the barrage is the price chart. The absurd focus on moment-to-moment price changes is enough to knock any true investor off his or her game. Check out this graphic from the CNBC app. (This image is 7 years old, so I don't know if it still exists on the app. But it is illustrative of short-term price thinking.)

Click to enlarge

Look at the time-frames you can select to display. Six out of seven are one year or less, with the shortest being one day or two days. How can you possibly think about or execute your long-term strategy if your focus is drawn to these insignificant lengths of time, or if you are effectively obsessed by them?

In this next graphic, which is the signal and which is the noise?

Click to enlarge

For the price-obsessed, the blue line is the signal. Check the time from early 2006 (the left edge of the chart) to early 2012, a period of 6 years. To the price-obsessed, that was a period of dead money, which in turn was reason enough to sell Johnson & Johnson (NYSE:JNJ). We read that often during that time period.

But for the long-term investor, the real signal was the orange line - JNJ's dividend payouts that rose every year. The company was (and remains today) healthy and growing. The blue line makes you doubtful, the orange line helps you have confidence. The orange line reflects what is really going on with the company rather than what is going on with the stock price in the market.

Rotella says that trusting is not easy or instinctive for most golfers. From reading here on SA, I think that is true of many investors. They make their best analyses; make a decision to buy, hold, or sell; and then spend inordinate amounts of time second-guessing themselves.

That's not healthy or likely to lead to investing success. Let me be clear: It does help to analyze, dispassionately, one's successes and mistakes, in order to figure out what lessons to draw from them. But that's not an emotional activity, it is an analytical one.

Constant second-guessing is different. It leads to paralysis by analysis. Or to constantly changing what you do, churning your investments, before what you did has any chance to play out.

In a long-term strategy, short-term price movements (say shorter than a year) rarely have any educational value. They help sell newspapers, page clicks, and advertising, but they don't help the long-term investor very much in making intelligent decisions.

Conservative Strategy, Cocky Swing

I teach conservative strategy and cocky swing….You want to play each hole in such a way that you're confident you can execute each shot you attempt….You swing with trust. It produces your best results. The opposite approach would be a bold strategy and a tentative swing. [That] would have you attempting shots you are not confident that you can hit.

The analog in investing is to plan your work and work your plan. For many investors, the best strategy is a conservative one that balances risk with reward, seeks relative safety of principal and income, and keeps the investor making decisions that he or she truly understands.

That last point is key. The investing analog to Rotella saying don't try shots that you are not confident in is the famous quote from Tom Watson Sr., Founder of IBM (NYSE:IBM): "I'm no genius. I'm smart in spots-but I stay around those spots."

Warren Buffett has used this quote many times. It means to stick to areas that you understand. If I watch CNBC for a couple of hours, I am exposed to many ideas that I don't understand. So while they may be touted as investment opportunities that I ought to participate in, they are actually noise to me.

The best thing I know to do with noise is to tune it out. That's why I don't watch CNBC much. For the way I invest (as a dividend growth investor), CNBC is almost all noise.

If they ever introduce "The Dividend Hour," I will watch that.

Game Plan

No football or basketball coach whom I've ever heard of would send his team into competition without a game plan….A good game plan makes the mental side of the game easier. Players don't have to make as many impromptu, possibly emotional decisions. They can instead execute decisions made in advance, calmly, outside the heat of competition.

I have written about strategy and planning many times. Preparing an investing plan is the same as creating a map for a journey. Your goal is where you want to end up. Your map tells you how to get there. Your plan should be realistic and actionable - for you.

The goal in investment planning is the same as the goal Rotella states: Don't put yourself in a position to need to make a lot of impromptu, emotional decisions. The purpose of the investing plan is exactly as Rotella states: To allow you to execute decisions made in advance, when your thinking was clear and calm, rather than reactive decisions made in the heat of the moment.

Thrive under Pressure

A golfer chokes when he lets anger, doubt, fear, or some other extraneous factor distract him before a shot. Distracted, the golfer then fails to do one or more of the things he normally does. He fails to follow his routine….He forgets his game plan. He fails to accept his [results].

I don't know about you, but I see a lot of anger on Seeking Alpha. The Federal Reserve is often reviled, as if "the FED" is responsible for all bad investing outcomes. Company mistakes are described angrily. Investors seem to be mad at themselves for their own errors.

The fact is, as an investor you are going to make mistakes. Accept them when they come along. Try to learn from them, but then move on. There are other decisions to be made, and it does no good to be dwelling on past errors. That never helps you make good decisions.

The only "shot" - investment decision - that you can do anything about is your next one. Don't let the media, the Fed, extraneous noise, or your own past errors negatively impact your next shot.

Two of Rotella's suggestions for thriving under pressure in golf apply directly to investing.

Stay in the present and keep your mind sharply focused on the [decision] immediately in front of you.

Stick to your routine and your game plan.

We read a lot about the multitude of behavioral biases and flaws that we have as investors. I believe that they have become overblown to the point of suggesting that investors may as well give up and just index, because you can't control yourself.

I think that is a wrong conclusion. My belief is that investors can do just fine by thinking rationally about what they are doing, identifying their true goals, laying out an intelligent plan, ignoring the noise, and sticking to their plan.

Disclosure: I am/we are long JNJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.