This is Part 1 of a 2-Part post series. Part 2 is available here.
Charles Kirk of the eponymous Kirk Report wrote a recent guest post entitled 10 Rules For Better Trading for Wall St. Cheat Sheet (which is produced by the Hoffman brothers, Damien and Derek). In the post Charles takes an article from Golf Digest – 10 Rules For How To Win Your Major – written by the sports psychologist Dr. Bob Rotella and discusses how the 10 rules in the Rotella article can be applied to trading.
As readers of Texas Holdem Investing know The Masked Financier is a promoter of the use of gaming analogies to explain the elements of investing and trading. And it is interesting to note that The Masked Financier has heard lately that Dr. Rotella has started to work with traders. However, one needs to exercise care when using sporting analogies for investing because in some cases the dynamics of sports situations don’t translate directly to investing and trading.
Clearly there are a number of elements that make sports an good medium for discussing the characteristics needed for good investing and trading.
- Ambitious players in sport need to practice hard by repeating similar actions again and again, learning from mistakes is essential, and commitment is necessary even when all seems lost.
- Risk management is an important part of sports, as is the case with investing.
- Performance and using good judgment under pressure is a key requirement for sporting excellence.
However, there are two major issues that mean sport is not an entirely appropriate framework for discussing, teaching, and learning investing.
- In sport the player can generally affect the outcome of the game (or situation within a game) by direct influence on either the player’s own performance or by affecting the performance of the other player(s) in the game. In most investing markets, the investor cannot in any way affect the performance of the securities that have been selected. There are some markets where the investor can affect outcomes such as private equity where the investors generally take control of the company being acquired and can make management changes. But these situations are in the minority and the average investor is often unable to access these asset classes. A good sportsperson may find the investing world somewhat frustrating because once an investment is made it is a case of waiting without being able to do anything pending a view on where the market moves. Even a team sports manager, while not on the field, can make changes to the team and its strategy.
- Commitment when all is lost is an important part of sports – often described as the “never say die” attitude. In the field of investing commitment to your business and trading plans in the face of poor short and medium term results is an important part of improving your likelihood of success. However, in the context of an individual trade, commitment when all is lost can be a serious flaw, leading to the phenomenon of “doubling down” on bad investments when clearly the original thesis has turned out to be wrong. This type of commitment to a lost investment cause in the face of facts can have negative effects on your investment capital levels.
- In sport the game itself generally does not involve putting money at risk. Naturally in professional sport the players’ salaries and winnings are affected by their performance, but the payment profile here is generally one of upside only i.e. playing badly in a game will never result in a player losing salary or prize money (unless in the case of foul play), just forgoing extra earnings. And clearly in amateur scenarios there is no money at risk at all. Since putting money at risk is such an intrinsic part of investing (and trading) this difference between sporting scenarios and investing needs to be taken account of carefully.
One recent unfortunate description of how prowess in sports does not necessarily lead to financial ability is a recent piece by the New Rules of Investing blog about the poor investment and financial records of professional athletes.
The next part of this post will provide an interpretation of Dr. Rotella’s 10 rules on golfing mentality from the perspective of the Texas Holdem Investing method. This perspective will also take account of the two issues described in this post.
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Spot on, although golf can throw up pressure cooker situations, one poor shot cannot wipe out you entire net wealth. In fact golf is probably an excellent example of a call option.