How to win at tennis - and investing

“Wealth isn’t primarily determined by investment performance, but by investor behavior.” 

- Nick Murray

I’m a lot better investor than I am a tennis player, and that’s not saying much.

Years ago, however, I learned a valuable lesson about both subjects from a book entitled, Winning the Loser’s Game by Charles Ellis. It cites a study that concluded that in most professional tennis matches, about 80% of all points are won. But in amateur tennis, 80% of all points are lost. Professionals win by hitting winning shots past their opponents. Amateurs win just by getting the ball back over the net more often.

And so it is with investing. It turns out that it’s not how many brilliant stock picks or market calls we make that determine our success; it’s how many big investment mistakes we avoid.

Unless you are in the financial services industry (or are one of my clients), you’ve probably never heard of Nick Murray. He is a retired financial advisor and now a respected author and consultant. I am proud to count Nick as a friend and de facto mentor.

In his book, Simple Wealth, Inevitable Wealth, Nick identifies eight common and potentially deadline mistakes – behavioral mistakes – that investors make routinely (quotations are from the book):

• Under-diversification. The “fatal narrowing” of a portfolio down to essentially one idea. Often seen in the latter stages of bull markets when a single investing concept (technology stocks, real estate, etc.) becomes excessively popular.

• Over-diversification. Believing you are properly diversified simply because you own a huge number of investment vehicles, often resulting in hidden gaps and redundant costs.

• “The complete loss of an adult sense of danger. Your only concern is that somebody somewhere owns stocks that are going up more than yours.”

• The opposite of euphoria, when investors are tempted to abandon successful long-term investment strategies and give in to their fears that prices will go down indefinitely.

• Investing with borrowed money after failing to realize that what magnifies positive results also magnifies losses.

• Speculating when you think you are investing. “All short-term trading is speculation, in that fundamental values do not change quickly. An investor is always interested in long-term improvements in earnings, cash flows, and dividends. A trader is interested in quick changes in price, and is therefore always a speculator.”

• Investing for current yield instead of for total return. A common mistake among retirees and other investors searching for more portfolio income without realizing that higher total returns are often found in lower-yielding investments.

• Letting cost basis dictate your investment decisions. This can happen when: a) you refuse to sell a profitable investment because of the taxes you’ll have to pay on the gain; or b) you refuse to sell a poor investment until it returns to your purchase price. There’s a familiar old Wall Street saying that, “the stock doesn’t know what you paid for it.”

We win in tennis by keeping the ball on the other side of the net and in golf by keeping it in the fairway. In both cases, we win not by hitting more winning shots but by limiting the number of bad ones. As investors, we succeed not by trying to perfectly time the market or find the next glamour stock, but by reducing the size and frequency of our mistakes.

And the way to do that is to follow strategies that have worked over time, allowing them time to work, and having the good sense to stay out of the way.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation

Raymond James is not affiliated with Nick Murray.