Investing like Federer

Let me start with a story.

One day an elderly couple saw a young man, probably in his early thirties, playing tennis in one of the corner courts of their exclusive country club in Florida. This couple had spent their entire life engrossed in their business and had never really followed the sport. They had sold their business and chose a peaceful retired life. Now that they were retired and extremely wealthy, they thought that picking up tennis would be a good thing. The young man who was playing seemed to be doing it effortlessly. The lady decided to try her hand at the sport. The next day she approached the tennis director at the country club who promptly enrolled her on the tennis program. To her dismay, the lady found that the game was really difficult. She was not able to control the ball. It was either sailing wide of the court or hitting the bottom of the net. She went to complain to the tennis director saying that the game which she saw being played by the young man seemed so easy. The guy did not even seem to be making an effort. And here she was huffing and puffing and yet not able to make a single shot. The tennis director turned around and said, “Maam, yesterday the person you saw here was Roger Federer. He is perhaps the greatest tennis player in the history of the game”.

This is a true incident.

Why am I telling you this story?

Just like studying about or watching Federer on TV will not help you play like him, similarly reading Buffett, Munger, Lynch and others will not make you invest like them.

The availability of information today, especially on social media, is so much that just by repeated exposure people tend to get a feeling of expertise. It is like if you see a cookery show about making an omelet everyday for six months, you will start getting a feeling that you are an expert at it. It may not even occur to you that you may not know how to even light the gas stove. Making a great omelet is really not easy. How hot should the oil be? How much do you beat the eggs? How much salt to add? How long should you fry one side? When do you flip sides? None of this can be learnt from watching omelet-making videos. You need to live through it, experiment with it and then slowly after a few times you will get a hang of it.

The same thing applies in investing as well. Repeated exposure to investment gyan and discussion provides an illusion of knowledge. Investing is a “lived” skill. The legendary trader Paul Tudor Jones once said, “This skill is not something that they teach in business school. I get very nervous about the retail investor, the average investor, because it’s really, really hard. If this was easy, if there was one formula, one way to do it, we’d all be zillionaires.”

Becoming a good investor takes dedication, patience, curiosity and tremendous hard work. It requires building up a network of investors and industry contacts who can help you do the scuttlebutt. Just sitting and reading in a room with no computer screen sounds idyllic but is not the reality. At least not for people when they start off. Maybe, it can be done after spending fifty years in the investment arena.

Here are some pointers for those who wish to learn to play at the top of the league.

• Practice everyday: This means you need to study a business or industry everyday. All knowledge is incremental, so if you keep doing it, it will compound.
• Learn the language of investing: You need to be able to read the financial statements.
• Inculcate the right mindset: The biggest determinant of returns over longer periods comes from investor psychology. Two people buying the same stock at the same time at the same price may end up with completely different results as one may be able to hold on through many ups and downs and the other may sell in panic or euphoria. The way to build the right psychology is to reflect on your past buy/sell decisions, the reasons why you took them and what would you do differently if the same situation arose again. Maintaining a decision journal in the initial years might also be very useful.

In summary, we need to understand that the game of investing requires a lot of hard work and dedicated effort. When the masters play, they make it look easy. But it isn’t. It is actually a very difficult game. And that is why the success rate is very low. To get the odds in your favour, approach it like an elite athlete.

This article first appeared in The Economic Times.