I rather enjoy playing golf. But there’s no denying golf is infested with raccoons trying to sell you stuff. Swing trainers. Special clubs. Systems “guaranteed” to lower your handicap. This ranges from the oversold… …to the utterly ridiculous. Not to mention a fair bit of coattail riding on anyone with an aerospace engineering background. Golf’s a lot like investing that way. And a lot like life, for that matter. Once I realized this, I began to enjoy the game much more, as an exercise in both mental and physical discipline. Any progress I’ve made on that front, I credit first and foremost to the book Every Shot Must Have a Purpose, by Pia Nilsson, Lynn Marriott and Ron Sirak. It’s rather critical of current methods of golf instruction and
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I rather enjoy playing golf. But there’s no denying golf is infested with raccoons trying to sell you stuff. Swing trainers. Special clubs. Systems “guaranteed” to lower your handicap.
This ranges from the oversold…
…to the utterly ridiculous.
Not to mention a fair bit of coattail riding on anyone with an aerospace engineering background.
Golf’s a lot like investing that way. And a lot like life, for that matter. Once I realized this, I began to enjoy the game much more, as an exercise in both mental and physical discipline.
Any progress I’ve made on that front, I credit first and foremost to the book Every Shot Must Have a Purpose, by Pia Nilsson, Lynn Marriott and Ron Sirak. It’s rather critical of current methods of golf instruction and training—particularly of what the authors see as an overemphasis on technical mechanics at the expense of player psychology. Early on, they write:
This is where honesty comes into play. The first step toward expanding our perception of the game in general and reaching a better understanding of our own game in particular is to face reality. If that bad swing was caused because you tensed up under pressure, hitting a million practice balls won’t fix the problem.
Rather than the minutiae of swing mechanics, or gimmicky shortcuts, you’re better off focusing on:
- Course strategy and risk management
- Shot commitment
- Focus and tempo
We see this in investing, too. Particularly when we’re investing other people’s money. The most grievous portfolio construction issues I see inevitably seem to center on basic issues of strategy and commitment. Particularly around whether a portfolio should be built to seek alpha or simply harvest beta(s).
You don’t have to shape your shots every which way and put crazy backspin on the ball to break 90 in golf. Likewise, not every portfolio needs to, or even should, strive for alpha generation.
There are few things more destructive (or ridiculous) you can witness on a golf course than a 20 handicap trying to play like a 5 handicap. And it’s the same with portfolios. For example, burying a highly concentrated, high conviction manager in a 25 manager portfolio at a 4% weight. Or adding a low volatility, market neutral strategy to an otherwise high volatility equity allocation at a 2% weight. (See: Chili P is My Signature)
I’ll go out on a limb and suggest very few financial advisors and allocators build portfolios capable of generating meaningful amounts of alpha. The hallmarks of portfolios purpose-built for alpha generation are concentration and/or leverage.
The hallmark of a portfolio lacking strategic direction and commitment, on the other hand, is optical diversification that rolls up into broad market returns (more pointedly: broad market returns less expenses).
I’m absolutely not arguing every portfolio should be highly concentrated. Or that every portfolio should use leverage. I’m merely arguing that portfolios should be purpose-built, with portfolio construction and manager selection flowing logically from that purpose.
How is it we end up with portfolios that are not purpose-built?
We don’t commit to the shot.
Nilsson, Mariott and Sirak describe a textbook golf example:
Patty Sheehan, the LPGA Hall of Fame player, was playing the final hole of a tournament when she needed to hit a fairway wood second shot to a green protected by water on a par-5 hole. A birdie was essential to play in contention, and the possibility of an eagle was a chance she had to take. What resulted, however, was her worst swing of the day–in fact, probably one of the worst swings she ever made in competition—and she cold topped the shot. As the ball bounded down the fairway and into the creek short of the green, she watched her chances of winning disappear with it. […]
[T]he TV commentators missed the point. If they wanted to run a meaningful replay they should have shown the tape of the indecision BEFORE Sheehan hit the shot. First she had her hand on a fairway wood, then she stepped away from the ball and her caddie handed her an iron. Then she went back to the fairway wood. The indecision in the shot selection led to a lack of commitment during the shot. The poor swing resulted from poor thinking.
For an investment committee, the rough equivalent is the four-hour meeting that results in a 50 bps change (from 4.50% to 5.0%) to the emerging markets weight in the Growth model portfolio.
At best you are rearranging deck chairs with these kinds of moves.
Granted, when it comes to investing some of us will have a more difficult time managing shot commitment than others. For the self-directed individual, this is simply a matter of managing your own behavior. Advisors and institutions, on the other hand, must manage other people’s behavior, often in group settings.
There’s no easy solution to this issue. It can be fiendishly difficult to manage. But there’s at least one essential precondition for shot commitment in investing and that’s a shared investment philosophy. A code.
I’m not talking about the obligatory investment philosophy slide of everyone’s investor deck that’s included to pay lip service to a “process orientation.” I’m talking about genuine philosophical alignment. The kind of philosophical alignment that runs deep into the marrow of the decision makers’ bones and therefore permeates every aspect of portfolio design and management.
What does this look like in practice?
More time spent on philosophical discussions around persistent sources of returns and, more importantly, whether the investor(s) can credibly access them.
Significantly less time spent on chasing shiny objects, debating the merits of individual investment manager performance and statistical rankings of investment manager performance. (In fact, it’s okay to spend basically no time on this at all)
Significantly more time spent on managing the alignment of expectations across investment professionals, clients and other stakeholders in an accessible, plain-language manner.
This is fairly straightforward in principle, but extremely challenging to execute.