Recently reading Legacy: What the All Blacks Can Teach Us about the Business of Life, a couple of thoughts immediately occurred. One was how the book’s views on the mentality of golfers could be the starting point for a nicely topical article in the run-up to this year’s Ryder Cup. Another was to wonder why a member of my own team might have given me a book that is largely about team management.
Saving that second issue for somebody’s next appraisal meeting, we will focus on the golf point, which the book’s author James Kerr brings up in the context of loss aversion – the idea that investors feel the pain of a loss twice as keenly as they do the pleasure of a gain. In doing so, he refers to Thinking fast and slow, the 2011 book by Nobel Prize-winning behavioural theorist Daniel Kahneman.
One of the ways Kahneman illustrates how the human brain is wired to avoid loss is with the curious statistic that professional golfers have a much better success rate when they are putting to save par than when putting for a birdie. In the latter instance, golfers are apparently more likely to leave the ball short of the hole while, putting for par, they are more likely to hit past the hole.
In other words, the prospect of a dropped shot would appear to concentrate the mind whereas the potential plus of a shot gained leaves the professional golfer much more tentative. In Legacy, this leads into a discussion of how the All Blacks aim to overcome such negativity and indeed seek to use the very odd occasion when they do lose a rugby match as motivation not to let it happen again.
Now, clearly it would be an unusual fund manager who did not aspire eventually be seen as an ‘All Black of investing’, so is this technique of using a past loss to inspire improved future performance something that could translate into the world of finance? Here on The Value Perspective, we would argue it is not that straightforward.
It is all very well saying, yes, this is where I went wrong last time, I have learned my lesson and I am going to use that experience to drive me forward – but there are a couple of important differentiating factors when it comes to investment. For one thing, if you underperform as an investor, it is highly unlikely to be down to a question of whether you tried hard enough.
As we never tire of repeating, here on The Value Perspective, the way to succeed in investment is to seek to take emotions such as fear and greed out of the equation – hence our adherence to a value framework. And wrapped up in this unemotional approach is an understanding that investors operate in a probabilistic world, not a deterministic one.
Think about it this way – if you hold out a cup and let it go, what is going to happen? All things being equal, you would put all your money on the cup hitting the floor. Yes, there is a theoretical possibility that, this time, the cup will fly off and hit the ceiling, but experience tells us a dropped cup will always hit the floor. That is how a deterministic world works.
Investors, however, operate in world where there are a whole spectrum of possible outcomes – as we have discussed in articles such as Luck and judgement. We cannot therefore think, well, that did not work so next time I will do the opposite and achieve the right outcome – in investment you could do everything ‘right’ and lose a lot of money and do exactly the same the next year and make a fortune.
In this probabilistic world, if our analysis told us we should buy Company X and it did not work out then, regardless of the fact we may have ended up looking like fools, if the next year we come across Company Y in the exact same set of statistical circumstances, we should be doing the exact same thing all over again and buying into it.
Of course, that is a whole lot easier said than done – which is why you will find no shortage of professional investors who are content, as it were, to ‘putt for par’. Rather than giving it their all in a bid to chalk up a ‘birdie’ for their portfolio, they will too often worry about overshooting the target and leaving themselves too much to do on the next shot.
They worry in other words that – in a helpful synchronisation of golfing and investment terminology – they will miss the return, and so they simply look to nudge towards their target. Here on The Value Perspective, however, we take a different view: investment is not purely about avoiding loss – it is about doing all we can to make money from mispriced risk.
As such, we are always prepared to go for the birdie – to put all we have into the putt and never leave it short – because we know the benefit of a value approach is that we will have at least 18 putts a round. It is not therefore about whether we succeed or fail on a single hole but – as any Ryder Cup team member knows so well – whether we are ahead at the end of the match.