Bookworm: Are investors making the same mistake as many golfers?
Even if we truly want to get better at what we are doing, it is easy to focus on the wrong things.
Welcome to Bookworm, my regular column that shares insights from books and other writing that I think can help investors achieve their goals.
Each edition falls under one of three principles: owning quality assets, fostering a long-term mindset, and putting process over emotion.
Today’s edition concerns putting process over emotion, but this is not your standard Bookworm.
I am writing this from my hometown in Scotland, and our source of inspiration today is rather different to usual.
Scotland’s gift to the world
As well as the excitement of attending my brother’s wedding, a big positive of coming home was always going to be the golf.
My town is surrounded by world-class courses and pretty much everybody plays. So to avoid embarrassment, I have been practicing hard.
This included reading a famous book on golf psychology called “Golf Is Not A Game Of Perfect” by Bob Rotella on the plane. Little did I know that an insight from the book would also resonate deeply with my journey as an investor.
If you are far more of an investor than you are a golfer, stick with me. You will see where I am going with this very shortly!
How to get better at golf (and investing)
As everyone knows, the whole point of golf is to hole your ball in the lowest number of shots. Eighteen times.
The biggest factor in your success isn’t how far you can hit the ball, but how good you are at shots from short range.
Most golfers know this but neglect honing their short game. Why? Because it is a lot more exciting to spend your practice hours trying to hit 250 metre bombs at the driving range.
Unfortunately for my ego, Rotella delivers a firm reality check to this kind of golfer in his book.
“If you’re not spending 70 percent of your practice time on shots from 120 yards in” he writes, “you’re not trying to become the best golfer you can be”.
This made me blush at 37,000 feet. I am definitely not the best golfer I could be. And I definitely spend at least 90 percent of my practice range smashing balls as far as I can.
In other words, I am completely undoing my genuine desire to be a better golfer. Which got me thinking – are investors prone to making a similar mistake?
Investing over investments
As investors it is also easy for us to prioritise our efforts in a questionable manner.
This often takes the form of obsessing over what we can buy next. Hunting the next big stock idea is fun and, when it comes off, can leave you feeling pretty good about yourself.
It’s a bit like hitting a 300 yard drive in front of your friends. But one shot doesn’t make a round. And the next stock I buy isn’t likely to be the biggest factor in whether I reach my financial goals in 30 years.
That is far more likely to be decided by how suitable my approach to investing is, and how well I stick to that plan.
Perhaps we should be thinking less about what we can buy next, and more about making sure we are investing in a suitable way.
What is a good investing plan?
This brings us to what a good investing plan might look like. At Morningstar we think it should encapsulate four things:
- Being clear on what you want to achieve and when.
- Knowing what returns are needed to achieve it.
- Being conscious of what edge you are trying to exploit, if any.
- Arriving at a set of investing criteria that make sense given the above.
Here is a simplified example of mine:
- My stock portfolio has the goal of facilitating a comfortable retirement for me and my family in 30 years’ time. To hit the dollar target I have set for that, I will need annual returns of something like 9% per annum from here.
- To do that, I want to flex the advantages of being an individual investor rather than a professional – namely my ability to invest without career risk and prioritise long-term returns over short-term ones.
- With all of that in mind, I want to own companies that I am comfortable holding for the long-term (due to qualities such as a durable moat, decent long-term prospects, et cetera). Even if the short-term outlook may not be great.
Of course, you will still end up considering potential investments. But you can do so with a lot more structure and with the end goal firmly in mind.
A good sign that you have a solid plan is that your portfolio holdings make sense in the context of your goals. You could tell a reasonably informed investor about what your goals were, and they’d understand why you hold what you do.
By contrast, focusing purely on what to buy next can leave you with a portfolio of random stocks that sounded good at the time but don’t really align with what you want to achieve.
I’ve been in both boats, and I certainly feel a lot more comfortable with where I am today.
For more on building a sound investing strategy for yourself, try this step-by-step guide by my colleague Mark LaMonica.
Bonus: A postcard from Prestwick
One of the world-class courses I was talking about earlier is Prestwick Golf Club. In 1860 it hosted the first ever Open Championship.
A lot of the course has changed since then. But today’s seventeenth, which was hole number two in the old layout, plays exactly the same. This makes it the oldest existing hole in championship golf. And it is a belter.
A blind tee shot is followed by another blind shot over two peaks – the “Alps” – that give the hole its name. Only then do you see the notorious Sahara bunker ready to catch your ball on the other side.
In case you were wondering, your author walked off with a triple bogey. I better get working on that short game.
Previously on Bookworm:
