Everyone and their brother has something to say about investing, and the top 100,000 (roughly) quotes have been written down for posterity.
- “It’s a compromise between what your ego wants you to do, what experience tells you to do, and what your nerves let you do.”
- “It’s about how well you accept, respond to, and score with your misses much more so than it is a game of your perfect shots.”
- “For this game you need, above all things, to be in a tranquil frame of mind.”
Warren Buffett could have said all of these.
But if there’s one arena with more quotes than investing, it’s golf. Because if there’s one thing people like more than picking stocks, it’s shooting par.
That’s right. Those quotes above are actually about golf (sorry!). But they read perfectly for investing, too, right?!
I’ve been playing a little golf in my own life, and I had a small epiphany after my latest adventure chasing balls through the woods: golf and financial literacy are basically the same. Below are seven perfect examples.
Risk and Reward
Every shot choice in golf is a trade between risk and reward. Pure and simple.
Do you go for the green from here? Even though it’s over the water and between the bunkers? If you make it, you’ll have a putt for eagle (a.k.a. a really good score). But if you miss that shot, you’re in trouble. There’s a risk.
All golfers take risks on the course. But smart golfers only take risk when there’s more-than-commensurate reward. Will you trade strokes now for fewer strokes later?
This is identical to investing. Will you trade money now for more money later? Will you take risk now for the prospect of future reward?
Howard Marks famously said, “Investment success doesn’t come from ‘buying good things,’ but rather from ‘buying things well.’”
Golf is the same. Nobody hits all holes-in-one (except in Pyongyang). Instead, smart golf is about hitting the smartest shot in each particular situation.
Consistency is a Skill
Howard Marks also has famous comments on investing consistency. If you’re just a tiny bit better than average—but consistently so—the sky’s your limit (and the math backs him up).
Of course, consistency is easier said than done in investing markets. And the same can be said for golf.
Read more: Streaks and Skill
Consistency on the golf course sounds easy. Hit a drive into the fairway. Hit an approach shot near the green. Chip the ball close to the hole, then putt it in. Rinse and repeat 18 times, and you’re a scratch golfer. Easy.
But the easiest aspect of golf is the ease of missing. It’s easy to hit drives in the woods, irons into the bunker, chips over the green, and three-putts into the hole. It’s easy for a would-be par to become a triple-bogey.
Consistency, in other words, is incredibly hard. It’s a skill.
And just like in investing, that skill can be tremendously rewarding.
Reduce Your Range of Outcomes
If all your eggs are in one basket, your range of outcomes is wide. Drop the basket? All broken eggs. Hold onto the basket? All whole eggs. All or nothing.
Diversification and portfolio construction help investors manage the risk of “dropping a basket.” These techniques reduce their range of outcomes. Would you rather have:
- 95% chance of $2 million, 5% chance of $1 million, or
- 50% chance of $4 million, 50% chance of $0
The second scenario has a higher expected value than the first ($2.00M vs. $1.95M). But almost all people would prefer the first scenario, where their range of outcomes is much more predictable. And almost all good financial planners think that way, too.
Good golfers also reduce their range of outcomes.
For example, how would you approach a 50 foot putt? Would you try to sink it?
An experienced golfer might opt for a “lag putt.” Their goal is to get the ball close enough to the cup for their second putt to be a near-guarantee.
They aren’t going for a one-putt miracle. Instead, they’re eliminating three-putts from their range of outcomes, essentially guaranteeing their outcome of a two-putt.
Smart golf—like smart financial planning—is about reducing the range of outcomes.
Course Management is Financial Planning
New golfers might look at a typical hole and think:
- Shot 1: hit it as far as possible, down the middle
- Shot 2: hit it to the middle of the green
- Shot 3: putt for a birdie
- Shot 4: if needed, putt for par
This all sounds well and good (and all too easy).
But experienced golfers start with the end in mind. They think about the hole location on the green and how the putting surface slopes. They ask, “Ideally, where do I want to putt from?”
Then they step backwards. To putt from their preferred spot, what’s the best area of the fairway to hit their approach from?
Then they take another step back. To hit from their preferred spot on the fairway, how should they drive the ball off the tee?
Their drive is influenced by their putting goals. Their present choices are influenced by their ideal future.
This is called course management, where a golfer strategizes their choices now to have better results later.
That’s just like financial planning.
Let’s think about the 20-year-future version of you. What financial steps can we take now to ensure that future-you reaches all your financial goals? Let’s work backwards from the future to understand the optimum choices to take today.
Course management is financial planning.
Budget Your Strokes
If you’re a “12-handicap” golfer, you can expect to shoot about a 12-over par on an average course. You’ll hit some pars, but mostly bogeys.
So when you’re playing the hardest hole on a given course, you can budget an extra stroke to help your mindset.
So you’re facing a long, challenging par 3? Give yourself an extra stroke. Treat it like a par 4 in your brain and take risk accordingly.
Stretching beyond your golf skill and capability hurts more than it helps. Stretching your financial budget beyond its capability definitely hurts more than it helps. Financial hardship is often a function of stretching a budget beyond its means.
Know yourself and budget accordingly.
Hit Your Goals
Jack Nicklaus once said, “You’re playing against the golf course, and you’re playing against yourself.”
In other words, don’t pay attention to how other people are playing. Their scores are independent of yours. You’re only playing against yourself (your history, your goals, etc).
This is just like goals-based investing (a.k.a. bucketing your money). Only you know what your financial goals are. Your portfolio should fit in with those goals. Other people have different goals with different portfolios. That’s fine.
Don’t play against them. Just meet your own goals.
The Bad Parts Are Similar Too…
The bad parts of golf and investing are similar too.
Investors take on too much risk. Golfers go for 1-in-a-million shots.
Investors suffer a loss, then stretch too far to make up that loss. Golfers hit a bad shot, then try for a miracle to make up for it.
Investors see my uncle Jim Cramer on CNBC and think, “Hey, if he can do it, why can’t I?”
Golfers see Tiger Woods at The British Open and think, “Hey, if he can do it, why can’t I?”
One great shot can make a whole round worthwhile. And one great stock pick can convince you’re a genius**
Through good and bad, investing and golf are the same.
The 19th Green
Huge shoutout to reader Eric S. who reminded me that markets, like golf, “are circular, like a carousel. You pay the quarter, you get on the horse, it goes up and down, and around. It’s circular. Circle, with the music, the flow. All good things.“
That’s enough for this round.
If you’re a golfer looking to invest or an investor looking to golf, think about the smart (and dumb) parts of your current expertise and apply them (or avoid them) in your new venture.
If only I could putt as consistently as I dollar-cost average…