Hockey season is in full swing and that can only mean three things: Our own Jim Gillies is glued to the television set, we'll find out whether my Detroit Red Wings can win without Steve Yzerman, and it's time for an investing lesson.
Before you start thinking this is a lesson where I compare great skaters and scorers like Gretzky, Lemieux, and Jagr to growth companies, stop. That's because we're going to stay near the crease. We can become better investors not by focusing on how to score goals, but on how to prevent them from being scored. That's right -- if we want to be better investors, we need to learn from the netminders.
The best goaltenders make great decisions
According to a recent study by University of Calgary researcher Joan Vickers and graduate student Derek Panchuk, decision-making is very important to be a successful goalie. Here's the quote that got me thinking:
"Goalies often focus on physical things like improving technique but they overlook the decision-making," Panchuk said. "This study shows that you also need to focus on your decision-making and your thinking processes. Having optimal focus is just as important as being in optimal physical shape."
As I see it, here's what successful goaltenders do:
1. They always know where the puck is.
2. They scan their surroundings for important pieces of information, ignoring the other stuff.
3. They use the data to make good decisions and position themselves properly to prevent goals.
As investors, we should, too
Like goalies that focus on the physical aspect of the game, investors need to understand business and finance. And that makes sense because we need to understand how to calculate financial ratios, what has worked in the past in investing, and concepts like competitive advantage.
But relying solely on financial knowledge can only take us so far. That's why great investors like Charlie Munger and Bill Miller have, for years, stressed decision making as a very important part of the investing process.
A simple plan
By emulating the netminders, we can put together a simple plan that can help us generate better returns. And while this is not a guaranteed way to generate better returns, I certainly think it's a road map that can put us on the path to making better investment decisions. Here's what we can do:
1. Focus on what's important.
2. Ignore what's not.
3. Use the data to make better decisions.
Data and information pours down on investors every hour of every day. And not all of it is worth listening to. Lately, we're hearing rumors that Sears Holdings'
We read about stocks that rose on above-average volume. Should we jump into stocks that rise on high volume, like Scottish Power
Finally, you can get a stock quote anywhere. Stock prices are very difficult to ignore because they're ubiquitous in today's information age and play a part in determining our investment returns. But heed to words of Warren Buffett -- checking them too often is a distraction that can do more harm than good if we are not careful.
You're probably asking yourself, "What should I focus on, then, Dave?" To me, I think it's more important to focus on return on invested capital (ROIC), competitive advantage, and price versus value.
Investing is about allocating your money to the vehicles that generate the highest returns, not necessarily that one with the price that's rising the fastest. On any given day, stock prices can go up for any number of reasons, or for no reason. But over time, capital flows to the investments that create the highest returns.
Let's use eBay
Better investing through better decisions
Bill Miller's "cohort in intellectual crime" at Legg Mason
The Foolish bottom line
To be a good investor, you have to understand business and finance just like a good goalie has to be in great physical shape. But to be a great investor or a great netminder -- we're talking Warren Buffett and Martin Brodeur good -- you have to be able to make good decisions. That's because being a good decision maker can give you an advantage, leading to better returns over time.
Home Depot is a Motley Fool Inside Value recommendation and eBay is a Stock Advisor selection.
Retail editor and Inside Value team memberDavid Meierdoes not own shares in any of the companies mentioned. He is ranked 103 out of 14,280 investors in The Motley Fool'sCAPSrating service. You can view his TMF profilehere. The Fool takes itsdisclosure policyvery seriously.