Today I want to tell you about a very successful group of investors who have one thing in common…
They all play golf.
What has golf got to do with investment, you may ask?
Perhaps you think that these fellows play the game with captains of industry. Or tongues wag in the clubhouse bar afterwards, letting slip little nuggets of inside information.
Actually, neither of these things happen…
I prefer to think that the qualities that make a good golfer make a good investor. Let me see if I can convince you…
1) Have a Repeatable Method
No two golfers have the same swing. Some have a long backswing, others a short one. Some bring the club from outside a straight arc while others come from the inside. Some have a quick tempo, others slower.
Any style can work just fine so long as you do it consistently. A golfer must find what works best for them, cement that through practice, and then play the game in this way.
To make a good investment return there are many different ways of skinning the cat. Some people look for high dividends. Others look to buy into companies that are due to recover from hard times. Some like the top-down view, starting with an economic forecast and then working down to find those companies best placed to benefit – not a method I recommend.
One man I knew had a very simple and disciplined method…
Reasoning that the fortunes of big companies like Unilever or the Prudential were essentially stable and did not vary as much as the swings of their share prices implied, he sought to buy their shares at the bottom of an observed trading range and sell out at the top.
Aside from the fact that he made a good return, the beauty of this method was that he was not at all worried about the macro picture, nor did he make any effort to research companies other than the few he was following.
Whatever your preference – and mine is for small, well-financed companies with discernible growth prospects – stick to it. Wait until you find shares that fit your particular bill and don’t get tempted into anything else.
2) Visualize the Shot
Before you hit a golf shot you should always have a clear picture of where you want to hit the ball and how it is going to get there. This is why the professionals spend such a long time eyeing up the shot and chatting to their caddy.
If you don’t think about what you are really trying to do, you are unlikely to pull it off.
The parallel in investment is to know what you expect to happen after you buy a share.
Perhaps, based upon your own research and the utterings of the company, you expect that the company will pay a higher dividend, will announce a 20% hike in profits, will successfully execute acquisitions or will bring a new mine into production next year.
Note here that we are focussed on what the company will do and not what the share price will do, and investors should always worry most about the former and very little about the latter.
Having set these expectations, the investor must then watch to see if they are delivered. If the company fails to do what is promised then warning bells should start to ring. Possibly there are valid excuses for the company’s failure, but otherwise the company is either unable to deliver on its promises or else it has deliberately pulled the wool over shareholders’ eyes.
Investors should almost never give companies the benefit of the doubt. If it fails to produce the shot you, with due conservatism and realism, have visualized, then it is normally best to sell out.
3) ‘Golf is not a Game of Perfect’
The title of a book by the great golf coach Bob Rotella is, ‘Golf is Not a Game of Perfect.’
Not every shot you hit will be perfect. In fact almost none will be.
Just as every golfer will hit some duff shots, so investors will sometimes make some bad calls. In golf we are dealing with a body that will not do what the brain commands. In investment we are always basing our judgements on information that is to some degree, imperfect.
But this is not the point…
What matters is the average quality of the eighty or ninety shots the typical golfer will hit in the course of his round. And for investors, what matters is the average success of the many investment decisions they will make. You can afford to get quite a lot wrong. If 70% of your decisions are correct you will end up making a very handsome return.
Another useful tip for golfers is to judge their game not by the quality of their best shot, but by the quality of the worst.
If the worst that happens is that the ball goes into the rough or a bunker, that might cost you a shot, but it will not kill you. But if you hit one sideways off the tee into a pond, that really hurts. The investment equivalent here is a share that loses 90% of your money.
One way of avoiding this is to use stop-loss limits, but a better way is to do your research properly before investing and to work with conservative assumptions. Any experienced investor will tell you that the game is as much about avoiding the losers as it is about finding the winners.
4) Get in the Zone
When golfers talk about being ‘in the zone’, they mean a state of relaxation, of being in the moment, with a focus upon the shot at hand and nothing else.
Crucially, they are not worrying about their score – indeed on the handful of occasions that I have found this trance-like state I have been quite unaware of my score until I have added it up at the end.
The good golfer’s attention is upon the process and not the outcome, and in investment this is absolutely crucial.
Investors can easily suffer from a psychological flaw called ‘anchoring’, which basically means that they get fixated on a particular share price. If they buy a share at 50p they will automatically sell it at 75p because a 50% gain is a satisfying round number. They might sell out a 25p because a 50% loss is as much as they can bear. Alternatively, they might hold on or even average down, believing that if a share price was once 50p it must be only a matter of time before it finds that level again.
Neither of these selling decisions have any logic, because they are simply determined by the relationship of a share price to where it once was, irrespective of the progress of the company or any other factors.
An investor who is ‘in the zone’ simply tries to make good decisions, day by day. If the company in which they are invested continues to progress they will hold onto their shares, week after week, month after month, year after year until one day they find their initial investment has multiplied ten-fold. And if one of their companies turns sour, they will sell out irrespective of the price they paid and where it is now.
In short, just as a golfer knows that their score is only the consequence of the way they have played the game, an investor must understand that if they make good, well researched decisions, then over time they will make money.
All of which brings me to this small group of investors called, for reasons that I will leave you to guess, is called the 3 Ball Club.
There are five of us. We have all worked in the City, we all love the stock market and we all invest our money in shares.
Two or three times a year we get together for a game of golf when we discuss amongst other things our annual share picking competition. At the start of each year we name our favourite five shares, and whoever picks the group that give the best return over the next twelve months wins the prize.
The best recorded average return from one of these five share baskets over one year has been 112%, the worst a loss of 23%. The average annual return of each entry has been over 20% which proves, I think, not only that it is perfectly possible to select winning shares but also that golfers make good investors.
So what have the team picked for 2018? I won’t go through the full list, but those that have jumped out of the gate fast are Spectra Systems, Filta Group, Premier Oil, Boku, and ECSC. When you have returned from the driving range – take a look!