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Friday, April 15, 2016

Want to be a successful long-term investor? Act like a professional golfer

For the uninitiated (and the disinterested), here is a brief outline of the career progression of a typical professional golfer:
  • an early interest in the game from a father who plays golf and/or proximity to a public golf course
  • interest turns into passion - leading to playing regularly come rain or shine
  • lessons from a local golf instructor that fine tunes skills
  • appearance in local golf tournaments where skills and potential are recognised by experts
  • a golf scholarship from a college/University
  • competing in inter-college, regional and national amateur tournaments
  • becoming a professional golfer after (or even before) completing a college degree
  • honing skills in lower level professional tournaments before qualifying for national/international level tournaments
  • maintaining status in national/international level tournaments by winning at least once in two years, or by consistently performing every year to be ranked within the top 100/150
  • winning one or more Major tournaments - like the Masters, British Open, US Open, PGA Championship - to earn a place in the Hall of Fame
If you are still with me so far, visualise those bullet points as a large funnel. Thousands of kids around the world show an interest in the game that turns into a passion. As they progress along the skills and experience path, the funnel starts to get narrower and narrower.

Many don't make it to college. Those who do, fail to make a mark in inter-college tournaments. Only a handful perform outstandingly at the amateur level to get a direct entry into a few professional tournaments. The rest grind their way through lower level professional tournaments, and may never get to play in any of the Major tournaments.

So, what does all this have to do with successful long-term investing? I'm coming to that.

Making big money as a professional golfer is extremely difficult, if not impossible. How difficult? Only 5 golfers in the entire history of the game have managed to win all the four Major tournaments in their careers. Many well-known golfers have never won a Major. A few have won one Major tournament only to fade into oblivion after that.

In the recently concluded Masters tournament, last year's winner Jordan Spieth had a 5 shot lead with 9 holes left to play. Everyone expected him to win again. Inexplicably, Jordan dumped two shots into the creek in front of the 12th hole to lose his lead and finished second. 

The game itself requires a lot of skill and dedication. On top of it, one requires an extraordinary amount of patience and equanimity. Unlike in most professional sports, golfers don't make any money just by playing in a tournament. They have to qualify for prize money by being among the top 60 or 70 after the first 2 days of a typical 4 day tournament that has 140+ entrants. Several past winners failed to qualify for the last 2 days of the 2016 Masters.

Tournament organisers rarely help in arranging travel and hotel bookings. So, a golfer has to take care of all logistics and pay upfront from his own pocket for travel and lodging. If he fails to qualify after the first 2 days, he has to pack his bags and go home without earning anything, or head for the next tournament early to put in some practice to iron out mistakes.

Anyone who has been investing in the stock market for any length of time should be able to draw an analogy from the golfer's career funnel. 

Most investors show a lot interest and passion initially. But they become euphoric when a stock's price moves up and get out quickly; or, fail to remain calm under adverse circumstances, averaging as a stock's price continues to move down.

As losses increase, many investors sell and give up. Others soldier on in the hope of recovering their losses, but often fail to do so. Only a very few develop the skills, patience and equanimity to make money consistently and build wealth over the long-term. 

Moral of the story? Learning about fundamental and technical analysis is necessary but not sufficient. Having the correct mental make-up - of being dispassionate at a gain or a loss and taking the appropriate buy/sell decisions - will separate the long-term wealth-builders from the short-term thrill seekers.

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