Investing and the world of sports might, at first glance, not seem to have any immediate connection.
But according to Howard Marks (Trades, Portfolio), these two separate disciplines have a lot in common.
In one of his now famous memos to Oaktree Clients, Marks laid out his reasoning for this argument.Ă‚
There's more to investing than just buying stocks
The primary similarities between investing and sports are not related to money. Both are strict disciplines that require structure and commitment to be successful at. These are the similarities that Mark's believes connect the two.
“Baseball is ninety percent mental, and the other half is physical.” That was another of Yogi ’s dicta, and I think it’s highly useful when thinking about investing. Ninety percent of the effort to outperform may consist of financial analysis, but you need to put another fifty percent into understanding human behavior. The market is made up of people, and to beat it you have to know them as well as you do the thing you’re considering investing in."
There is more to investing than just finding the best stocks to buy. To be a successful investor, you need to understand how the market works and how other market participants react to developments. As the extract above notes, a large part of investing is based on fundamental analysis but if you don't understand market psychology, you are setting yourself back significantly.
"To be above average, an athlete has to separate from the pack. To win at high-level tennis, a player has to hit 'winners' – shots his opponents can’t return. They’re hit so hard, so close to the lines or so low over the net that they have the potential to end up as 'unforced errors.' In the absence of skill, they’re unlikely to be executed successfully, meaning it’s unwise to try them. But people who possess the requisite skill are right in attempting them in order to 'play the winner’s game.'"
And just like top athletes, for investors to become the best, they need to make game-changing investments, investments that make them stand out from the rest of the group.
This approach is not suitable for all investors. If you haven't put in the research time and effort, building up investment skill, you would be unwise to try investing with the mindset of a champion.
"The first-level thinker does that which is conventional and easy – and which doesn’t require much self-confidence. The second-level thinker views things differently and, as a consequence, is willing to take actions...But they're unlikely to be done in the absence of conviction. The great investors I know are confident second-level thinkers and entirely comfortable diverging from the herd."
First- and second-level thinking feature heavily in Marks' writing. First-level thinkers take what they see at face value, while second level thinkers ask "why" and look for more information before concluding.
What's more, second-level thinkers are entirely comfortable diverging from the rest of the herd to make their own investment decisions. In some ways, high-level athletes have to think with the same mindset. They cannot replicate what everyone else is doing and have to have a certain level of self-confidence that permits them to act aggressively in the way they think best. Copying what everyone else is doing it is not going to win you that championship.
"It’s great for investors to have self- confidence, and it’s great that it permits them to behave boldly, but only when that self-confidence is warranted. This final qualification means that investors must engage in brutally candid self-assessment. Hubris or over-confidence is far more dangerous than a shortage of confidence and a resultant unwillingness to act boldly. That must be what Mark Twain had in mind when he said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so." And it also has to be what Novak Djokovic meant when he said, “It’s a fine line.”
Disclosure: The author owns no stock mentioned.
