Recently I heard an interview with retired professional golfer Jack Nicklaus. He talked about how technological advances in golf equipment has made a positive difference for today’s players.
Unfortunately, new golf equipment has done little to advance my golf game.
After purchasing a new driver, my slice off the tee remained. Clearly, better equipment and tools in the hands of golf experts has the potential to add distance and accuracy. This same equipment in the hands of an occasional golfer makes less difference.
Advances in investment tools in the form of ETFs is a “game changer,” with the potential to add distance and accuracy to investment returns.
However, just as a golfer with poor technique sees little benefit from a new driver, an investor that does not know how to properly use a specific ETF may not see “game changing” results. Today’s investor has far more than 14 clubs in his golf bag. He or she has the choice of more than a thousand targeted, transparent, and traded ETFs.
I have had the occasion in recent years to attend two PGA tour events. I enjoyed watching the tour professionals on the driving range and on the putting green hours before teeing off. The discipline of the practice routines was memorizing.
I remember watching Rory McIlroy on the putting green as he followed an intricate process of hitting putts from a variety of angles and distances. He set tees at a variety of distances, and he had to successfully sink puts from all areas before moving on. Later that day, we watched Rory from behind the green on the first hole. It was no surprise when Rory sunk a similar length putt that I had watched him consistently practice just a few hours before.
One of the main takeaways for me from watching a day of professional golf up close was the ability of the pro golfers to adapt to a variety of distances, conditions, and difficult lies. As they approached each shot, they seemed to know which club to select and where to aim.
As ETF strategists, we follow the same practice and care in ETF selection and in the management of ETF portfolios. If the investor is not careful about selecting the appropriate ETF “club,” it is the equivalent of playing an entire round with only a driver, or trying to putt with a nine iron. Both are essential clubs, but they should be used in different circumstances.
I loved watching the golfers find creative ways out of difficult lies. There was rarely a sign of outward dismay or panic. Instead, they seemed to have prepared for this moment by deciding ahead of time how they would respond. They already had a framework for making decisions. Unfortunately, good decisions and technique are not rewarded on every shot. Legendary golfer Bobby Jones said, “Golf is the closest game to the game we call life. You get bad breaks from good shots; you get good breaks from bad shots – but you have to play the ball where it lies.”
It is often most dangerous for long-term wealth creation when the market temporarily rewards poor decision-making and bad investment behavior. On the other hand, sound investment strategies may be abandoned when swallowed by noisy markets or when a particular strategy or asset class is out of season. However, we would argue that good technique, top equipment, physical strength, and mental toughness will lead to better golf over a round, a season, and a career.
The golf “process” is fundamental to success. In my experience as a very average golfer, I will hit a great shot a few times during the course of a round. Unfortunately, I am not aware enough of my golf process, technique, or form to know what I did so that I can replicate the good shot! I am just as likely to top my next shot, slice it, or hit it in the lake.
As golfer Davis Love Jr said, “A routine is not a routine if you have to think about it.” The thinking should be done ahead of time! Careful investors create a routine for how they will respond to a variety of market conditions. This allows an investor to adapt as market conditions change through a thoughtful, disciplined process rather than making decisions in the grips of market emotion. Most successful golfers do not change their swing technique in the middle of a round. Instead, they know their technique, equipment, and skill set well enough that they know how to adapt to weather, fast greens, or a difficult lie.
British golfer Harry Vardon (featured in the movie The Greatest Game Ever Played) stated, “For this game you need, above all things, to be in a tranquil frame of mind.”
Golfer Tom Watson admitted, “The person I fear most in the last two rounds is myself.”
Vardon and Watson could just as well have been speaking about investing. Behavioral mistakes in the form of emotional, irrational decision-making are significant threats to sustained success in investing. How do we feel when, the TV, radio, and internet are shouting at us about an imminent market crash? Conversely, do we become overly confident after seasons of strong performance?
All of us have played rounds of golf when a particularly bad shot seems to linger for several holes. Does a sound investment strategy with temporary performance that looks different from the “market” linger in our minds and lead us to bad decisions?
Golfer Chi Chi Rodriguez said the following, “I’ve heard people say putting is 50 percent technique and 50 percent mental. I really believe it is 50 percent technique and 90 percent positive thinking, see, but that adds up to 140 percent, which is why nobody is 100 percent sure how to putt.”
Just like there is not one perfect method of putting, there is not a perfect investment approach or ideal ETF selection process. There are many approaches that will lead to success if carefully followed over time. However, disciplined, steady, objective, rational thinking and behavior is a requirement for sustained investment success, no matter the investment approach.
After watching professional golfers surrounded by galleries of people, cameras, and pressure, I was astounded by their ability to filter out the “noise” and focus on the next shot.
As Ben Hogan said, “The most important shot in golf is the next one.”
The concept of “always a next shot” is a wonderful, yet challenging element of ETF investing. Successful investing is always about creating future income and future return.
Whether investing for an institutional fund or for a family saving for retirement, we never plant the flag, declare victory, and end the pursuit of capital preservation and growth. Investing is like playing an endless round of golf—there is always another hole to play. There is good news—there is likely an “ETF club” that can make a positive difference as you approach your next investment shot.