Lining Up Your Shot

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When I first learned to play golf, my father told me to be aware of where the hazards lay prior to hitting a shot. He said course management is often just as important as having the perfect swing. And all these years later, I’ve come to believe that the same can be said about managing a portfolio and investing money.

Not having the right knowledge can paralyze you, because you are afraid to make a decision; conversely, having the right knowledge will allow you to prosper.

If you do your homework, you’ll likely conclude that a slow, steady approach to investing is the key to compounding your money. One mistake people make when golfing is trying to hit the ball too hard. This is very similar to someone taking on more risk than necessary when investing. You’ve heard the age-old saying: “Slow and steady wins the race” Well, that’s true with both investing and golf.

I was ecstatic that Winfred listened to my advice when we were playing those holes at Dallas National Golf Club. One of the biggest mistakes people make in golf — and similarly in investing — is making drastic and overly risky decisions. Watching Winfred pause to consider his next move, and the advice he was receiving, gave me great hope that he will do the same whenever a money move presents itself.

When Winfred hit the shot into that sand trap, his first instinct was to overreact and try to hit a long shot. This is the same with people who lose money on an investment; they’ll usually attempt to over-correct by taking an even bigger risk. Most times, all that does is lose them even more money.

A prospectus is an important tool that you need to properly play the game. Technically, a prospectus is a legal declaration that requires companies to meet transparency standards by disclosing certain facts and statements to ensure investors aren’t mislead in any way. And although reading long and tedious financial documents might not seem very exciting, it can tell you a lot about a company’s intentions.

For individual investors, the trick is distinguishing between statements that would likely appear in almost any prospectus, and other statements that tell you about the distinct qualities of a company. The biggest factor to remember is that the prospectus outlines projections, not actual facts. There is no guarantee that the company will meet its targets for sales and profits, so it’s really important for the investor to look at the prospectus and decide if the assumptions are realistic.

Getting back to our metaphor, this is similar to golf in that you need to read the terrain and decide if the shot you are about to take is realistic. In addition to the prospectus illustrating the company’s current position, it also provides in-depth details about how it has performed in the past. It is extremely important to learn from the past, not just in investing but also in golf.

Winfred and I play at Dallas National on a regular basis, and we have found over the years what our strengths and weakness are on specific holes. We have learned from our good and bad shots in the past, and we continue to adjust and improve our games from our learning experiences. Whether in golf, investing or simply life itself, you’d be wise to do the same.

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