Investment Choices

When friends ask me for personal investment advice, my first step is to try to understand their risk and return tolerance. Asking for investment advice without specifying is like asking for medicine without the diagnosis of a disease. So I ask which do you care about more making money or avoiding losses. The answer is invariably the same. BOTH. The problem is that you can’t simultaneously go all out in profit-making and loss avoidance. Each investor takes a position regarding these two goals and usually, that requires striking a reasonable balance. The decision should be made consciously and rationally. It always comes down to a choice.

The best way of putting these decisions into context is to think out the two as DEFENCE VS. OFFENCE. One of the best ways to think about this is through the metaphor of sports. To establish the groundwork for this metaphor we refer back to the article ‘the losers game’ that appeared in the financial analyst journal in 1975. Charlie’s article described the perceptive analysis of tennis contained in professional and amateur tennis.

What can we learn from sports about our investing habits

The Game Of Tennis

Professional tennis is a winner’s game. In which the match goes to the player who hits the most winners fast paced and well placed shots that a opponent can’t return. Given anything other than an outright winner by an opponent, professional tennis players can make the shot they want almost all the time hard or soft, deep or drop shot, down the line or cross court. Professional players aren’t concerned with the factors that make the game challenging. The pros can reach almost all shots they receive and do what they want with the ball almost all the time. In fact pros can do it so sufficiently that tennis statisticians keep track of relatively rare exception under the heading of unforced errors.

source: google photos

The tennis the rest of us play is the loser’s game, with the set goes to the player who hits the fewest losers. The winner keeps the ball in play until the loser hits it into the net or off the tennis court. In amateurs tennis, points aren’t won they are lost, hence the loss avoidance strategy. To take it a step further and applying this strategy to my investments. It’s not so much about making big money as much is it about not losing money.

source: google photos

The choice between offensive and defensive investing should be based on how much an investor believes is within his/her control. However, they have to understand that in investing a few variables can change the outcome dramatically . Investments can be full of bad bounces, topspin, changed speed out wind and height of the net can change without a warning. The working of economics are high volatile and imprecise. Thinking and behavior of other players constantly alters the environment, even if you do everything right other investors can ignore your favorite stock. Management can slow the growth of a company, government can change the rules or nature can serve up a catastrophe. So much is within the control of the professional tennis player that they really should go for the winners and they better. Since if they serve up easy shots, the opponent will hit their winners and take the points.

In contrast, investment results are only partly within the investor’s control. Investors can make good money and outlast their opponent without trying tough shots. The bottom line is that the highly skilled investors can be guilty of overaggressive and misplaced shots that can easily lose them the match. Thus defense, significant emphasis on keeping things from going wrong is an important part of every great investor’s game.  

Categories: Financial Philosphies

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