I’m a huge college football fan.
From my days in The Ohio State University Marching Band (no, I did not dot the “i”), I’ve cheered the scarlet and gray to a multitude of wins, including multiple national championships. I even had to study Ohio State football history to win the favor of my future father-in-law, who took a coaching class with the great Woody Hayes.
So you can imagine the mood in the Keller household last Saturday evening, as my Buckeyes unexpectedly fell to the Purdue Boilermakers.
In my elevated emotional state, my disbelief transitioned to disappointment before bordering on disgust. How could we have lost that game? We’re the better team. We have better players. We should have won that game.
But on that day, on that field, my team lost. Fair and square.
When your team wins, it’s because you have incredible coaching, immensely talented players, a team that is coming together at just the right time.
The moment that same team loses, you question the coaches’ credentials, you question the talent level of the players, and you question everyone’s commitment. Didn’t they want it bad enough?
Investors love to play the same mental game. It’s been said, “Everyone’s a genius in a bull market.” When your portfolio is doing well, it’s because you have a solid investment approach, you have a battle-tested process that is rock solid, and you have the experience that compels you to outperform.
The moment the market moves against you, you either start questioning your process or you quickly blame someone or something else. We need someone to blame!
The reality is that even with a rock-solid process and a disciplined investment approach and a well-researched portfolio, sometimes the market just moves against you.
Combine the previous sentence with the fact that as professional investors become more and more sophisticated (based on wider access to information and computing power), investing returns will likely be based less on investor skill and more on luck. This is what Michael Mauboussin calls the “Paradox of Skill.”
If Ohio State and Purdue play that game 100 times, I’d bet the Buckeyes come out on top in 75-80% of the results. This was just one of the times when they did not.
How do investors prepare for a market where investor success is unpredictable?
Use all the tools at your disposal.
Even with market randomness, you’re still best served by having a thorough and well-designed investment process. How can you upgrade your approach?
Prepare yourself for being wrong often.
Have a clearly articulated game plan for managing risk and have the courage to recognize when you need to cut your losses.
Fight complacency.
Especially when we’re on a “good streak,” it’s easy to sit back and enjoy the ride. Be vigilant. Always be looking to improve your game.
It’s been said, “The market moves in a way that will cause the most pain to the most people.” You can minimize the mental anguish of investing by understanding and embracing the randomness embedded in the flickering ticks.
Be aware. Be humble. Be disciplined.
And remember, if the market was totally predictable, it wouldn’t be anywhere near this fun.
RR#6,
Dave
Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice. Please see the Disclaimer page for full details.