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August 6, 1997 |
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I had my weekly tennis lesson last night. My coach, Rick, said I had to work on my forehand more. So the whole lesson was devoted to how to improve the execution and consistency of my forehand. Instinctive Reaction After about 5 - 10 minutes of hitting the ball around, Rick stopped and asked , "Phil, do you know why your forehand is not consistent?" He continued, "You can hit the ball very well sometimes but you can't do it consistently. Sometimes your ball is long and other times it's too short to get over the net. The problem is you look up to see where the ball is going immediately after you hit your forehand." "Isn't this normal because you want to see where the ball is going?" I countered . Rick explained that when I looked up after I hit my forehand, it screwed up the follow through execution. As I shifted my vision to look up, my arm also moved upwards resulting in an incomplete follow through. As a result of the imperfect follow through, it affected the consistency of my shots. "I don't want you to look up after you hit the ball. Just keep your eyes on the ball!" demanded Rick. So I tried not to look up after I hit my forehand. However, the desire to see where the ball was going was simply too great to resist and I continued to look up each time after I hit the ball. It was hard to shake my instinctive reaction. Rick stopped and yelled, "Phil, if you really want to improve your forehand and have a major breakthrough, you've got to conquer that natural instinct to look up. If you just go with your instincts, you will never have a very good forehand. I want you to keep your head down and focus your eyes on the ball throughout your forehand. Do not look up until you hear me say OK." I tried my best to follow Rick's commands. After a few more instinctive looks up, I finally decided to just let go and not look up until I heard the OK from Rick. Surprisingly, once I stopped looking up and just kept my eyes on the ball, my forehand improved dramatically in all respects - accuracy, power, and consistency. I've never felt so good and confident with my forehand. "See what happens when you conquer your instincts and don't look up!" enthused Rick. Conquering Natural Instincts Investing in the stock market is actually not that different from playing tennis. The instinctive reaction of the majority of investors in the stock market is to look up to see where the stock price is going. There is a tremendous amount of focus on price movements because it is an instinctive reaction to want to see where the stock is going. Just like tennis, looking up and focusing too much on price movements will impede your investment performance. You may be able to hit a few good shots every now and then but you will never be able to break through in a major way in your investment performance. To do consistently well in investing, one of the first steps is to conquer your natural instincts to look up to see where the price is going. You need to hunker down, don't look up, and keep your eyes on the ball, i.e. keep your focus on the business. Concentrating on the business instead of price movements may feel unnatural at first, but once you discover how dramatically it can improve your results, you will never want to go back to acting on your instincts. Focus on thinking about how the business will perform 10 years from now, how effective its management is, whether it is selling at a reasonable price, etc. If you are in the right business, with the right management, and you get in at a reasonable price, then you will do well over time. There is really no need to look up to see where the price is going. If you can conquer your instincts to focus on price movements, you will be ahead of the majority of people in the stock market. In tennis, you need to get your basic forms correct in order to play well. If you don't have the basics, then your game will hit a ceiling very quickly and further progress will be difficult. You can practice forever but without the correct basic forms, you will never be able to play well. The same is true in investing. You need to have the correct forms - have a set of correct investment principles. These principles include your attitude towards stock market movements, conditions for buying and selling, your focus on investing in a business as opposed to pieces of paper with fluctuating prices. Without a set of sound, yet simple investment principles, you will never get very far in investing. And unlike tennis, the stock market can be a very expensive game if you don't have a correct form. Playing Not To Lose There are a lot of other parallels between tennis and investing. For example, I recall matches I played against players many years my senior. These matches remain among the most frustrating experiences I've ever had. While I ran around the court with all my youthful prowess, trying to grunt like Jimmy Connors after delivering (what I thought) were powerful shots, these seniors just gently and consistently returned each of my shots. Their shots were not particularly powerful (they kind of just dropped into the court), nor were they very tricky (they definitely didn't have the touch of John McEnroe). Yet these guys returned shot after shot of mine until I made a mistake with my strokes. In the end they won because I lost. One time, after beating my pants off, my opponent told me that his secret was simply to be consistent with all his returns. His aim was to get the ball back into my court and not lose the point. "I don't try to hit fancy, difficult shots. If I can return every ball and not lose the point, then my chances of winning are greatly increased. You kids are in too much of a hurry!" he remarked. This principle of being in a no-lose situation by taking care of your downside risks before thinking of the upside is one of the most important principles in investing. As Ben Graham so eloquently put it, "Rule number one in investing is not to lose your principal. Rule number two is not to forget Rule number one." You will be able to beat a surprisingly large number of people over the long run if you don't forget this principle. The Mutual Fund Tournament In the last few years, there has been a barrage of publicity about the majority of fund managers not beating the market on either a long or short term basis. Reportedly, less than 20% of the fund managers beat the market on a consistent basis (I suspect that less than 10% is a closer figure). This publicity caused a sensation that spawned contests between dart throwers and fund managers, i.e. those who pick stocks randomly via throwing of darts versus active selections by the pros. In a number of occasions the dart throwers do prevail. I am, however, not surprised by this revelation. It follows the so called 80/20 rule which applies to all facets of life, be it sports, business, or arts. According to Richard Koch in the book "The 80/20 Principle", 80% of the results flow from just 20% of the causes. Generally, 20% of products account for 80% of sales value and profits; so do 20% of customers; 20% of criminals account for 80% of the loot; and 20% of your clothes are worn 80% of the time and so on. In professional tennis, the bulk of the money is made by the top 10 players and the world is mostly interested in watching only these players. Fund management is no different - 80% of the fund managers don't beat the market and the bulk of the money is made by the top 10% of the fund managers. So this startling revelation should not come as a surprise. It just follows a time tested principle. Just because someone can get onto a court and swing a racket doesn't necessarily mean he or she is a good tennis player. The same goes for fund managers. Moreover, the entire structure and the dynamics of the fund management business actually work against superior performance. The modern fund management business is like a tennis tournament where the entire audience is chanting "LOOK UP! LOOK UP!" during the match. Everytime the players hit the ball and look up, there is thunderous applause. The seduction and pressure for the players to look up after every shot is just too great to resist. This "look up" condition in the mutual fund business is created by the market's structure and emphasis on short term performance. Quarterly and semi-annual ratings of funds are issued by Morningstar and other ratings authorities; and investors fixated on chasing the hot funds of the moment add to the deafening applause that force fund managers to look up. Fund managers covet such star ratings and attention as getting them will do wonders for the marketing of their funds. Therefore, if a fund manager wants his fund to do well in the next quarter or next 6 months, then he must buy stocks that will move in this short period. The pressure to buy stocks that move in the next quarter or the next 6 months is so great that most fund managers are forced to look up (at price movements) all the time even if they know this is not the best approach to investing. To improve one's investment performance, one should start by having a correct set of investment principles. Thereafter, practice as much as you can. The more you play, the better you will become. In investing, the way to practice is to review and analyze as many companies as possible. There are no two ways about it. The more companies you look at, the better you will become in judging businesses. With focus, discipline, and practice, you will be able to achieve above average results. It doesn't take a rocket scientist to do that. However, to become a world class player in that minority 10% range will require innate talent and mental toughness in addition to hard work and discipline. It is a fallacy to expect top notch investment results through just hard work, discipline, and focus alone (even though they definitely help) just as it would be unrealistic of me to think I could be as good as Pete Sampras if I train and practice a lot. To achieve satisfactory investment results is not difficult, but to achieve superior investment performance is much more difficult than it looks. Match Point When I went to the Amherst Tennis Camp in Massachusetts in June last year, I saw this quote pinned to the office door of our tennis director, Reiny Maier - "If you think you are beaten - you are. If you think you dare not - you don't. Success begins with our own will - it's all in your mind. Life's battles are not always won by those stronger and faster. Sooner or later the person who wins is the person who thinks he can!" With a sound and correct approach to investing, you can beat a lot of people that are faster and stronger in their raw talents. I liked this quote so much that I framed a copy on my desk. |
