If you ever go to a golf driving range count the number of people hitting their driver relative to the number of people hitting their pitching wedge. You’ll notice that the vast majority of amateur golfers focus excessively on how far they can hit a golf ball. This makes no sense though. If you’re like most amateurs you probably have trouble breaking 100. And that means you’re going to pull your driver out of your bag fewer than 15 times including the par 3 holes (unless you’re like me and you regularly keep that driver out to account for Mulligans). The point is, about 15% of your shots will occur with the driver. 85% of your shots will likely occur with an iron or putter. The short game is far more important than the long game.
Golfers focus on hitting the long ball because it is a greater form of instant gratification. It’s the what-have-you-done-for-me-lately effect. A golf round can last for 3, 4, 5 or 6 hours. A few moments of instant gratification can make a seemingly arduous day appear worthwhile. Of course, this is precisely the wrong way to win these games. You win by doing lots of little things right and avoiding big mistakes. Ironically, going for the long ball increases the odds of making big mistakes which increases your chances of performing poorly.
The investing corollary is the constant reach for the next Apple, the next Microsoft, the “market beating” fund manager or what Peter Lynch called the “10 bagger”. This chase is as alluring as the long ball in golf. And it’s just as destructive. But like most amateur golfers the average amateur investor doesn’t fully realize that what they’re often doing here is increasing the odds of making big mistakes in their portfolios rather than increasing the odds of winning (achieving their financial goals).
For most of us, achieving our financial goals has nothing to do with finding the next Apple, “beating the market” or landing the next 10 bagger. For most people allocating their savings boils down to two simple goals:
- Maintaining your purchasing power.
- Avoiding an excessive amount of permanent loss risk.
But the allure of the long ball and instant gratification is often too enticing to ignore. And so we keep pulling out that driver. Again and again and again.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.