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Investing and baseball
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by Paul A. Merriman
Publisher and Editor
I’ve seen it repeatedly. An investor comes into my office committed to a long-term buy-and-hold approach. Absolutely willing to tolerate a 15 percent loss on the road to presumed future riches. Understands the risks of the market. Knows some declines can be sharp and brutal, others long and drawn out. Understands that investing is a game in which the only outcome that matters is the final outcome, not the daily or weekly interim one.
And then markets drop suddenly, dealing our investor a loss of 7 or 8 percent. Suddenly it’s bailout time. Time to flee from a market that in a flash has become too scary and too risky.
When that investor bails out, there are usually not one but three losses:
1. Lost money. The bailout comes most often after a paper loss or a series of paper losses. It’s the "I can’t stand it anymore" syndrome. In this case, the investor just "can’t stand" to endure more paper losses. The only apparent relief from the pain seems to be pulling the plug on the investments. (Question for thought: Which is the real culprit here? Is it the market? Or is it the investor’s emotions?)
2. Lost opportunity. Often, but of course not always, the market stages a strong rally shortly after such a bailout. An investor who stuck it out could participate in that rally. But the investor who has walked away can only watch on the sidelines as the mutual fund he or she couldn’t wait to unload quickly moves up 5 or even 10 percent.
Economists have a concept called "opportunity cost," and it’s a very real cost. Make no mistake about it, an opportunity that’s lost can never be re-gained. Most of us have second and third opportunities, of course. But they are worthless unless we seize them when they are offered. And we are less likely to seize them because of loss No. 3:
3. Lost confidence. Once the market has chased an investor out of the playing arena, it’s unlikely that investor will rush in again. Even when opportunity looks obvious, many people who have been "burned once" are very wary of exposing themselves again. Too often, newly cautious investors retreat to the supposed safety of money-market funds or short-term bond funds. No longer so willing to trust their own judgment, they may flee from one advisor to another, hoping the change will bring relief that is permanent, not just fleeting.
Disappointed investors can escape from investments that went sour. They can escape from a stockbroker, a fund manager or an advisor whose choices didn’t live up to expectations. But investors cannot escape from themselves. And they can’t escape from their own emotions.
To quote from a T-shirt recently seen on the back of a teenager: "Defeat isn’t what happens when you get knocked down. Defeat is what happens when you don’t get up after you get knocked down."
Success: It’s neither easy nor painless
Somehow, perhaps because of the 1990s bull market in U.S. stocks, too many people have come to believe that successful investing is easy and painless. The truth is, it’s neither.
A baseball player who’s dying to score a home run may have to step up to bat hundreds of times and still not hit that ball over the wall. If you’re unwilling to keep going in the face of repeated setbacks and frustrations, you’ll never make it. And if you aren’t willing to endure some pain, both physical and psychological, you’re not likely to ever be the one triumphantly loping around those bases.
The same could be said of investing. If you want to be in the game only when it’s easy, only when it’s fun and only when you are winning, you won’t last long enough to ever get into the pennant race. There’s nothing wrong with this, if you recognize it about yourself and set up your investments accordingly. Maybe you should have 90 percent of your money in a carefully laddered portfolio of bank CDs and the rest in a conservative equity fund.
Keeping score
In the end, the thing that matters most to baseball teams is the score. With the rare exception of ties, every game produces a winner and a loser. After the game is over, it’s apparent who won and who lost. It’s in the numbers.
Baseball players watch the score every minute of the game. They know the statistics, the batting rotation on both sides, the strengths and weaknesses of both teams. They know what it means to be down by four runs in the eighth inning. But they also know that the only score that really matters is the final score.
The best teams may get discouraged, disheartened, disillusioned. But they don’t give up. The best teams continue to give it everything they’ve got, knowing that even seemingly hopeless games can be turned around in the ninth inning. And the best players never walk away just because they don’t like the score after four or five innings. Never.
Baseball is obviously very different from investing. But there are some similarities. Here’s one: In the end, the final score is what really matters to investors. At the end of a lifetime of investing, or when you are ready to kick back and retire, what matters is how much you have in assets. You either have what you need, or you don’t.
Like the best baseball players, the best investors keep track of the score as the "game" progresses. But like baseball players, the best investors don’t walk out just because they dislike the interim score. They know they may have to wait three years or three decades to find out the score that matters, the final score.
Here’s something else that’s similar between baseball and investing: Certain critical skills separate the successful players from those who fall by the wayside. One skill common to both endeavors is keeping your eye on the ball. But how you exercise that skill is totally different in baseball and investing.
In baseball, you must always, always, always know where the ball is. If you are ever on the field and you’re unsure of where the ball is, you’re looking for trouble.
In investing, "the ball" is your portfolio and especially its performance. But if you look at it all the time, you’re more likely to lose than to win.
Now I’m going to tell you something that’s very obvious to really successful investors. But it’s something that too many investors either don’t know or choose to ignore. That something is this: It doesn’t matter very much what a portfolio is doing today or this week or this quarter.
What matters is what happens to your portfolio over the long run, between the time you invest and the time you need to withdraw your money.
Too many investors pay too much attention to current prices and current returns. They bedevil themselves with needless anxiety. Worse, they act as if their feelings actually meant something. They sell when they feel like it and buy when they feel like it. But the market doesn’t give a whit about what you feel or I feel or what any investor feels … unless that investor happens to be trading billions of dollars worth of securities.
Caring passionately
When you’re a baseball player, you have to care passionately about the score – and the whereabouts of the ball – every moment of the game. Fortunately, the game is over after a few hours.
When you’re investing money, you should care passionately about what you’re doing when you establish your portfolio, choose your strategy and put it into action. But then you should stop caring passionately about it, unless you’re going to be an active trader and make investing a hobby or avocation. Stop looking at your fund prices every day. Stop watching CNBC. Stop thinking about your gains and losses every week and every month. Stop second-guessing yourself and your investment manager or managers.
The following is probably too harsh, and it will offend some people. But it makes a point: Investors (not active traders) who embark on a carefully crafted long-term strategy and then calculate the value of their portfolios every day or every week are likely to remain in the minor leagues. They are measuring the wrong things, focusing on statistics that don’t matter. And by doing that, they are squandering their energy and their time, which could be used to much greater advantage in some other way. They are acting as if they don’t really understand the game they are in.
I confess I don’t know a lot about baseball. But I can tell you that if you follow the rules below faithfully, you’ll be a better baseball player. And a better investor.
Merriman’s Three Laws of
Investing and Baseball
1. Your first task is to figure out whether you are playing baseball or investing money. (Here’s a hint: If you have a stupid nickname and you make a huge salary, you’re probably in baseball.)
2. If you are playing baseball, never ever lose track of what’s happening with the ball and on the scoreboard.
3. If you are investing, don’t keep your eye on the scoreboard. Check up on your portfolio every once in a while, as infrequently as you can tolerate. Don’t take it too seriously. Instead, spend your time and your energy enjoying life. Find out what produces joy for yourself and others. Then do those things. Let the professionals worry about your money. They probably do it better than you do, because it’s their job.
Source: http://www.fundadvice.com
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