Why You Need to Understand What Investment Game You Are Playing

“Success in this game depends less on strength of body than strength of mind and character” (Arnold Palmer)

Investing is not like rugby. On a rugby field, all of the players are playing the same game. The rules are the same for all of them, and they have the same aims.

That is not true for stock markets.

As Morgan Housel of Collaborative Fund recently wrote:

‘Investors on the same field play different games. We buy the same companies, read the same news, talk to the same people, are quoted the same market prices – but we’re everything from day traders to endowments with century-long time horizons.’

Chasing headlines

It’s easy to forget about this when you are watching the daily news.

When Tesla shares go up by 500% in a few months, for example, then it’s easy to feel like you really ought to own some. Or when there is a crash like there was in 2020, it is natural to want to get out and find safety until it is over.

These may even be good decisions for someone who is trading every day. But there are only a few people playing that particular game on the stock market. The average investor who is trying to secure their financial future definitely isn’t.

Long-term investing doesn’t make the news

Unfortunately, the news media isn’t really interested in what is useful to people who are investing for 10, 20 or 30 years. What is of interest to this kind of investor isn’t news.

What makes the headlines is what is happening today. But long-term investors aren’t really affected by what is happening in the market right now. What matters to them is what happens over decades.

They are not playing a game that depends on knowing which stocks are going up or down day by day. What they need to know is whether they are going to reach their long-term goals. And that means making decisions based on very different criteria.

What’s your handicap?

In this sense, investing is a lot more like social golf.

In golf, you can have two players of completely different ability playing together. Imagine a game in which one player has a 0 handicap, and the other is playing off a handicap of 30. They are playing on the same course, but their objectives will be very different.

The player with a 0 handicap has to play to the par of the course. So, for example, if they are playing a difficult par four, they have to try to take four shots or fewer to get the ball in the hole.

The 30 handicap player, on the other hand, will see the same hole very differently. ‘Par’ for them, would be to take six shots on the same hole. 

Only take as much risk as you need to

They will therefore view the course very differently. The better player will have to be more aggressive and try to drive the ball further to give them a chance of reaching the green with their next shot.

But the person they are playing with doesn’t need to take as much risk. They can be more cautious, just keep it in the fairway, and get to their objective in a steadier way.

However, just like in investing, it’s easy to be influenced on the golf course. If everyone else reaches for their driver on the tee-box, it’s easy to feel like you should do the same thing, even if you know that all you need is a five iron.

A rare investing power

Just like in golf, to invest successfully you need to know what your objective is. If you are investing for 30 years and only need to grow your money at 3% or 4% above inflation, you don’t need to take the risk of chasing short-term performance.

And, just like golf, you shouldn’t be influenced by the games that other people are playing around you.

As Housel says: ‘Understanding your game, without being swayed by people playing different games, is a rare investing power.’

To discuss whether you are on track to meet the goals on your personal financial journey, speak to your financial advisor.