Diamond Investment Lessons

With the World Series between the Boston Red Sox and the Colorado Rockies ready to kick off tomorrow night, it’s time for two of my favorite activities to come together: sports and investing! I have found that baseball can reveal useful reminders about how to navigate turbulent markets.

Stay loose and remember what got you to this point. One of the most admirable aspects of the World Series Championship Red Sox team of 2004 was their ability to stay loose, even when they trailed the Yankees 3-0 in the ALCS. This concept did not elude the Sox as they found themselves down 3-1 to the Cleveland Indians in the ALCS this year. Instead of throwing in the towel, they fought back, remembering that they had a fine team and a young ace in Josh Beckett.

Investors are sometimes thrown a curve ball when markets drop unexpectedly. Last week’s action was a great example of emotions infringing on sound investing. Instead of worrying about selling when everyone else was spooked, diversified investors looked at the landscape and recalled that portfolios that are distributed among various asset classes can weather volatile markets. With a clear mind, these same investors could analyze the situation without fear or panic and determine whether the economic landscape had changed and then make a decision about any action to take.

Try to ignore the crowd. Everyone told me not to worry about the Mets-they had a seven-game lead with just 17 games remaining in the season. But I kept thinking, “I love these guys, but they are just not that good.” As we now know, the Mets really were not that good, but Colorado was. On September 16th, the Rockies trailed National League wild-card leader San Diego by 4½ games, and Philadelphia and the L.A. Dodgers each by 3 games. From the outside, the Rockies were seen as a contender only mathematically, but not realistically. Today, the Rockies are the National League champions as winners of 21 of 22 games, arriving to the playoffs with a 14-1 run and then sweeping Philadelphia and Arizona in the first two rounds to get to the World Series.

The chatter was so loud about the Mets and so quiet about the Rockies, that it was hard not to get swept up (or down) by it. The same thing can happen to investors. You may know that your portfolio is not well-balanced, or that fundamentally, you are taking too much risk, but it’s so hard to tune out the market cheerleaders who are blathering on about the upside. This is especially true when markets are trading higher. If you can ignore the crowd’s cheers and concentrate on what is most appropriate for you, chances are, you will be better off.

Forget the short-term. This is a tough one, because it requires you to shut down some very real human emotions like fear and greed. When we are plagued with these feelings, we often make bad decisions. For example, when the Yankees were at a loss during the season and were fearful, they made an emotional decision to bring back former superstar Roger Clemens, rather than work with the young talent that already existed in their organization. As it turns out, the Yanks coughed up $175,000 per inning to Clemens and he flamed out in the playoffs.

In the investment world, the ability to push aside those feelings of fear and greed may help you avoid mistakes that are difficult to repair later. The best of example of this is when I speak to an investor who says that he is taking lots of risk in his portfolio because he doesn’t have a lot of time before retirement. This behavior is trying to make up for a lack of prior saving or the unwillingness to work longer. While it may work in the short-term, it is a very risky proposition on which to base your long-term planning.

There are so many more lessons to cover, but for now, you are should be ready to play ball, both on and off the diamond!