Avid golfers appreciate the game of golf for its unhurried pace, the chance to enjoy the outdoors, and the addictive feeling of making a great shot.
Surprisingly, there are actually a lot of similarities between the game of golf and investing. If you golf, you've already got a head start on understanding how to make your money grow. If you don't golf, you should at least try it - it's a great game. Read on to find out what the game of golf can teach you about investing.
1. Don't Let Your Mind Interfere With the Game
Golfers who let their emotions run wild will be on the fast track to having all balls in the rough, out of bounds, or in the sand (which is bad). In much the same way, investors cannot be ruled by their emotions. Fear, greed, and overconfidence are powerful emotions that can lead an investor to make poor investment decisions.
For example, an exceptionally risk-averse investor might sell a position that has lost 10% of its value within a short period, only for it to recover shortly thereafter. Alternatively, an exceptionally confident investor might believe he can consistently beat the market - resulting in more trades, higher trading fees, and possibly lower overall gains.
2. Learn from the Masters
Golfers can learn a lot of tips from golf greats such as Tiger Woods or Phil Mickelson, whose golf swings have been studied by both amateurs and professionals. Similarly, novice and sophisticated investors can learn a lot from investing giants such as Warren Buffett, Peter Lynch and George Soros.
The strategies that these investors followed vary widely, but can allow you to gauge the type of investing strategy that is best suited for your risk tolerance and goals.
3. Be Wary of Friendly Advice
Stock tips from friends are similar to golf tips from friends - you may have no way of knowing whether your friend's a "duffer". The hot stock tip you hear that is "sure to be a winner" could land your net worth in the bunker if you don't perform further research into the validity of the claim.
4. Find a Good Caddy
Unlike the "hobo caddy" that Adam Sandler's character used in the 1996 movie "Happy Gilmore", golf pros don't use just anyone to caddy for them during a big tournament. Good caddies have a strong knowledge of the golf game, and can advise the player on various strategies that might be useful for a particular hole. Caddies also have a strong understanding of the player's personality and style, and have a goal to keep the player's emotions in check.
In much the same way, a good financial advisor has exceptional knowledge of the stock market and investing, and will get to know their clients in order to understand what investment strategies are the best fit for their clients' future goals.
5. Watch for Red Flags
When golfing, a red flag indicates the hole, but an overlooked red flag in investing could put your investments in the hole. Before you invest your hard-earned money, be sure you read the prospectus.
6. Play the Percentages
In golf, making a conservative play and laying up in front of water is usually the best choice rather than trying to hit a hole-in-one. In the same way, buying penny stocks in order to land a tenbagger is not usually the best choice.
In essence, play the percentages. Wal-Mart (NYSE:WMT) and General Electric (NYSE:GE) were once-in-a-lifetime tenbaggers at one point, and you have a limited probability of landing a penny stock whose value increases 10 times in a short period. Furthermore, penny stocks are highly speculative due to their small market capitalization, and limited disclosure.
7. There Are No Mulligans
Unlike that second shot your partner might let you take during a friendly round of golf, there really are no mulligans allowed in professional golf games, or in the world of finance.
Take your time before you make an investment; there is no second chance if you make a poor investment decision. If you're unsure, seek the advice of a financial planner or advisor who can help you devise an investment strategy that is best suited for your situation.
8. Practice, Practice, Practice
Pro golfers such as Tiger Woods and Angel Cabrera didn't get to the Masters without a lot of practice and training - and as professional athletes, they never stop trying to improve.
Just as the driving range and countless hours on the golf course have helped the pros hone their skills, you can do the same by practicing your investing strategy with a simulated stock market game (like the Investopedia Simulator).
9. One Good (Or Bad) Game Doesn't Indicate Future Success
One round of golf is not going to be an indicator of your overall performance at golf. If you have one bad game, it does not mean you're a terrible golfer. Your progress over a number of years playing golf is a much better indicator of success.
A quote from Peter Lynch's book "One Up on Wall Street" (1989) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that."
The point is to base a decision on future potential, rather than on what has already happened in the past.
10. Fancy Equipment Doesn't Guarantee Success
Just because you decide to splurge on a custom set of clubs does not mean you'll be winning tournaments and rubbing shoulders with the pros at the Masters. Nor does it increase your likelihood of landing a hole-in-one.
In the same vein, purchasing expensive trading software does not mean you will find winning investments every time. There really is no foolproof way to pick investments. Fundamental and technical analysis might glean the probability of where an investment is headed (just as that custom driver might give you a longer drive), but in essence, price movements are largely unpredictable – especially for equities.
So, the next time you're about to tee off, it might be a good time to take a step back and consider how much you already know about investing through the game of golf. With that in mind, the task of getting your investments in order might not be as daunting as you originally thought.