FOOL ON THE HILL
University of North Carolina sports psychologist Richard Coop recently suggested that there is almost no difference in skill level between any of the top 100 or so golfers in the world. And yet, a certain few rise to the top, and their rewards trump those of the also-rans many times over. The difference, Coop believes, is emotional intelligence, the ability of certain golfers to restrict the damage of that bad round that is sure to come, and to rebound from it. So, too, in investing.
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Last week I was talking with my dad, a three-handicap golfer, about some of the interesting mental issues regarding the game of golf. He had recently gotten the chance to hear renowned University of North Carolina sports psychologist Richard Coop discuss his observations as a consultant to many of the top golfers on the pro tour, and what my father learned was quite interesting. Coop believes there is little difference between the skill sets of any of the top 100 or so golfers in the world. They have similar techniques, comparable work ethics, and their athleticism is essentially the same. And yet the difference in returns for the number-one golfer, Tiger Woods ($4.4 million earned on tour this year) and the #100 golfer, Craig Barlow ($382,000 earned) is dramatic. In his experience with pro golfers, Coop said, the best of the best are the ones who have the most emotional and mental toughness to go along with their athletic skills. (If you think about it, by the way, Barlow's got it pretty sweet. Four hundred large to play golf all year. Mercy!) Televised golf generally focuses upon great players making great shots. Like the rest of us duffers, however, the best golfers in the world hit some monumentally bad shots -- we just don't see them. Even the best golfers in the world, Coop explained, know to expect that of the four rounds of golf they will play in a weekend, they can only reasonably expect to have three good ones, at most. What separates the best golfer in the world from #100 is his ability to minimize the damage the one bad round does to his overall score -- and, just as importantly, to his ego. Golf and investing have some real similarities. They are individual pursuits. You only benefit in golf from your own decisions, and execution thereof, as they relate to the outside environment at hand. Investing is no different: You can be really, really intellectual about it, and still generate subpar returns because of an emotional incapability to react properly to opportunities and challenges. I'm going to try to beat this metaphor within an inch of its life by taking some of the observations Coop uses to assist golfers and applying them to investing. Restrict that ego You can't. Forget trying to, because it's just your ego attempting to trick you into thinking you have control when you don't. Ego is what told people in 1999 that, even if the market was in a bubble, they were smart enough to own dangerous companies and get out before everyone else. Ego even comes along with its own set of tools. Things like "sell stops," essentially programmed directions to automatically sell a stock if it falls by a certain amount from the purchase price: While they may have saved people money over the last 18 months, over the longer term they have triggered trades in companies that really should not have been sold. Do you not think every professional money manager in existence knows about the 8% sell stop rule? If a big money manager really wants to take a big position in a company, you can bet he's going to try to "trawl for stops" first by trying to knock the price down a few percentage points. In the most highly appreciated stock I own, I would have been stopped out on 23 separate occasions, in several instances during violent intra-day moves. Such tools have their places, but for how many people have stops created a security blanket that has let their own sense of invincibility go wild? In professional golf, the ego is the single most important determinant of who will be at the top of the list, and who will muddle along in obscurity (among a group, granted, with exceptionally high standards). Ego is what gives a golfer confidence on the tee the day after a shot on the same hole went so far awry that it damn near killed someone on an adjacent hole. More negatively, ego can cause someone to overestimate his or her skill level. How many among you who have played golf have found your ball deep in the woods (all of you, I'd guess) and convinced yourself that you could steer it toward the green through some tiny opening. Never mind that you've never, ever hit such a perfect shot before. Never mind that the smart play is to punch the ball into the fairway and give yourself a better shot next time around. You're going to grip it and rip it. I guarantee that there is a golfer with more physical skill than Tiger Woods somewhere in the world. What that player lacks is the thing that Woods has in spades: the ability to bounce back from those inevitable bad shots, and/or the ego control to make good decisions rather than constantly trying to make heroic ones. That first golfer will never, ever possess the complete game of a Tiger Woods. Skill's not everything, and when skill deserts you, freaking out will compound the mistake. For Warren Buffett, investing is probably pretty dull. Sure, he's passionate about it, but he has made a career out of ensuring that he avoids the kind of trouble that finds us mere mortals -- such things as a lack of understanding of a company we hold, overconfidence in our own abilities, extrapolating recent events into bad decisions, and impatience. None of these four common investor problems have ANYTHING to do with intelligence, and everything to do with emotional control. Emotional intelligence gives an investor a better chance of succeeding with the analytical tools he or she has. Without such emotional balance those tools are simply not going to be of much value. Remain true to yourself Others, such as an Arnold Palmer, are feelers. They have an instinct for the game that tells them what the best course of action is. This dichotomy exists in investing as well. There are Peter Lynch thinking types and Jim Cramer "I feel this is going to happen..." types. Both have been successful investors -- whatever else you wish to think about Cramer, the man has provided his hedge fund clients some spectacular returns -- but they come at the game from completely different vantage points. How many people were calling Buffett "out of touch" when he stubbornly refused to invest in technology stocks in the late 1990s? I would suggest that almost none of these people had any idea how to quantify the companies they were holding -- and yet the market, for a time, made them feel like geniuses. In order to invest, you must be able to create an advantage for yourself. Following the herd or garnering confidence from the "Happy talk" of others should in no way be a replacement for sticking to those areas that you know best, which is exactly what Buffett did. An awfully large number of investors got into big trouble by investing in profitless companies they did not understand. Assigning this tendency to "stupidity" would do us all a great disservice, because some of the people who got sucked in are awfully smart. It's not so different right now, but the other direction. In September, I bought American Express (NYSE: AXP), only to watch the stock get shellacked further. At this point people have seen enough damage to their portfolios that such a rapid move downward is a reasonable trigger to create doubt. But I have a plan, and that calls for me to try to invest in top-flight companies when everyone else hates them. I clearly cannot predict that people will start hating them less the moment I buy them, so to become disappointed by an immediate drop would have been irrational. I'm going to continue this discussion in Monday's Fool on the Hill column. In the meantime, if you have any comments, head over to the Fool on the Hill discussion board! Fiat Fool! Bill Mann, TMFOtter on the Fool Discussion Boards Bill Mann's handicap is substantially north of his dad's. Bill holds beneficial interest in American Express. The Motley Fool is investors writing for investors.
Whom God would destroy, he will first make overconfident. Ask a golfer what his best shot of all time was, and his ability to recall is nearly instant. Ask an investor about her worst decision, and the recall is not nearly as fast. Ego gives us the belief that we can control or predict things we cannot. Think about it: Are you constantly looking to predict the bottom for a stock, or the point in time in which the stock market will turn around?
Coop talks about two basic types of golfers: the thinkers and the feelers. Jack Nicklaus is the consummate thinker on a golf course. If you were to ask him about a particular hole on a particular round in a particular year, Nicklaus would more than likely be able to recall his club selection, weather conditions, and how he played the hole. Every time he steps into the tee box. Nicklaus is drawing upon a wealth of study and past experience to select the proper strategy.
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