Investors Stay in the Game

The past month has brought a slew of weaker than expected economic numbers. Housing, manufacturing, payrolls and consumer confidence to name a few, are all down. Investors are starting to get concerned, though some suggest it is pretty difficult to grow an economy when half the country looks like the Theater Box office – “Frozen.”

The concern reminds me of playing Little League baseball. I learned early on that no matter how much I practiced, even the very best of players only got on base about 40% of the time. That meant that the majority of times at bat resulted in a frustrating walk back to the dugout.

Other sports have similar statistics. In basketball, more baskets are missed than made. In hockey less than 15% of shots go in. This Denver Broncos set an NFL record this year by scoring 4.4 touchdowns per game. Since they averaged 12 possessions per game, that impressive statistic shows that 2/3 of the time they failed to reach the end zone. And of course all golfers know that most putts don’t drop, regardless of what they tell their friends later on.

Investors are bombarded with statistics every day. Wall Street reacts with each new release as if the latest number is the only number that matters. Like fans at a sporting event, investors too often cheer success or mourn failure by the results of a single play, or possession.

Winning at sports is not about scoring on every possession. Winning does not mean never failing. Winning is about preparing well, playing smart, minimizing mistakes, and scoring consistently enough to get the job done. (Sorry Denver fans)

Winning in investing is not much different. The truth is that most companies grow slowly, most product ideas take a long time to become profitable, most wealth is accumulated over decades, and most investors make lots of mistakes. The success of an investor is measured less in daily statistics and more in the ongoing score. Throwing an occasional interception or fumbling the ball once in a while, are all normal and not of great concern so long as over time the points keep going up on the scoreboard.

I have met many investors over the years that have made a few mistakes, gotten discouraged, and taken themselves out of the game. Ironically, their fear of failure has effectively guaranteed they cannot succeed. I have seen people panic because some short-term statistic didn’t come out the way they had hoped.

I have spent my life studying market statistics and have found a constant in most areas. The longer the time frame, the better things look. Stock markets are unpredictable on a daily basis. Monthly returns cannot be counted upon. Tracking results for one year can be fearful. Start to watch them for five years and they begin to show signs of order. Take a 10-year view and it is hard to find anything to worry about. Watch them over 20 years and the numbers tend to be so consistent and good you wonder why you ever worried at all.
In baseball I didn’t always get a hit, but I kept swinging and hit the ball enough to make my years in Little League some of my best times. As an investor, I have found the same principles apply.