Back in March 2008 we wrote a piece about football (only we Americans call it soccer). Football matches are low scoring affairs often decided by just one goal. When a penalty kick is awarded, the Goalkeeper is just 36 feet away from the shot taker and has all of 0.2 to 0.3 seconds to react. Not surprisingly, the kicker has the overwhelming advantage and penalty kicks are successful 75% to 80% of the time.
The question we asked back in 2008 was what is the best strategy for the Goalkeeper, to lunge to the left, to lunge to the right or simply to stand in the middle and do nothing? It may surprise you but a study by two researchers at the School of Management at Ben-Gurion University in Megeb, Israel, looked at over 300 penalty kicks and found that the best strategy that had twice the chance of success, was to do nothing. But Goalkeepers rarely stand and do nothing. If the shot is successful fans will scream, “why didn’t you do something?”
Wall Street is very similar to the plight of the Goalkeeper. If a market goes down and we don’t do something, critics will charge, “you are smart, why didn’t you see this coming and sell?” Yet over and over it has been proven that simply learning to go sit quietly in our room (and do limited trading) is the strategy that is most profitable. Every time you do something in investing it implies that you “know” something about the future. And face it, none of us know that much about what is going to happen, even a week from now!
Back to Football, Diego Alves of the Spanish side Valencia is one of the best Goalkeepers in the world today. He saves a remarkable 50% of his penalty kicks. What is his secret? Well first, he rarely stands still. Instead he is an expert at psychological warfare. Before the shot he talks to the shooter trying to break his confidence. And then when he does dive he has the great athletic ability to actually get his hand on the hard-hit ball and deflect it.
What might this tell us about investing? That maybe there are actually incredible managers who can outperform the market, who “see what everyone else sees but think what no one else has thought”, as one French philosopher put it. Having an Alves on your Football team definitely gives you a leg up but in investing, studies have shown over and over that a manager who does well in one period is not likely to outperform in the next.
So where does that leave us? Since it is difficult to hire the investment equivalent of Diego Alves, the best solution is to develop an investment strategy that meets your needs psychologically and financially and then….and this is the hard part….. just stick with it. Like the tried and true goal tending strategy, sometimes it is best to… Do Nothing.