Pro Golfers and Amateur Investors

After being in this game for a few years, one statement I can make with absolute certainty is that the worst investor in the world is the person who’s down slightly in a lousy stock. I’ve seen this countless times and it’s painful to watch. Maybe you’ve been this person, I know I have.
The problem with being down slightly in a loser stock is that the investor refuses—absolutely refuses!—to take a loss. Determination, which is normally a good trait, works against you. You wait and wait and wait, but the stock still sucks. The fallacy is that the stock doesn’t know you own it or where you bought it. Your entry point is completely unrelated to the stock’s quality. Many new investors don’t grasp this basic point.
The reason why this is so dangerous is that it reflects one of our strongest cognitive biases. In this case, it’s mental accounting. In our minds, we maintain a strict balance sheet or wins and losses. We think that selling for a loss is admitting defeat. In a sense, it is but experienced investors know that taking a loss can be a very smart move. It’s often far easier to recoup your losses in a new high-quality stock then waiting for the same old dud to finally turn around. Successful isn’t just managing your winners, it’s also about managing your losers.
This probably explains why market technicians often see stocks make short-term highs at similar levels because the folks who bought at the previous peak are determined to unload their shares for a gain, no matter how puny.
A recent study found that pro golfers suffer the same bias. PGA golfers are significantly more likely to make a par putt than an identical birdie putt. In golf, the rules are simple—a shot is shot. But the golfers don’t see it that way. Par is to be expected and birdies are a gift, therefore the pros are more conservative in their birdie putts than in their putts for par. The numbers say this is a bad move, but the pros do it anyway.
Not surprisingly, the difference comes down to length. The golf pros tend to bring their birdie putts up short. However, the easy tap in for par doesn’t come close to making up for their conservatism. The study’s authors calculate that the average PGA pro could take a full stroke their game for a 72-hole tournament. If a Top 20 player did this, it would improve their yearly haul by over $1 million.
Remember that a shot is just a shot, and a stock is just a stock. Where you bought it doesn’t matter to where it’s going.

Posted by on July 7th, 2009 at 10:20 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.