Sunday, August 31, 2008

Ping Pong, Patience, Psychology

After 48 years, the Singapore women table tennis team finally got through the nerve-wrecking semi-finals to end the medal drought. It was the most fascinating experience watching the semi-final game live. And hence the inspiration to draw parallels between table tennis and investing.

For those who missed the game (btw it was office hours, so most diligent, career-focused Singaporeans were actually working hard), let me just briefly summarized what happened. Feng Tianwei won the first match easily and it looked like the rest of the game should be a breeze for Singapore. But Li Jiawei lost the 2nd match after 5 tough games. Singapore came back to win the doubles, then Wang Yuegu lost the 4th despite putting up a very strong fight and it has to come to the 5th match. Of course our heroine Feng battled all out in the last match and finally broke the Koreans.

The Koreans are very defensive players, they sliced the balls all the time and simply waited for the Singaporeans to make mistakes. That was how Li Jiawei lost. She was not on form and her successful smash rate was definitely below par. But needless to say, when she succeeds, the smash was a sure killer. Feng, on the other hand, smashes with higher accuracy but seldom kills the opponent, ie they managed to defend. Feng is also definitely more patient, only smashing when she gets a good angle.

In investing, this concept is actually pretty important. Buffett used to remind us, "Imagine you only have 15 bullets in your life, do you shoot everything that pops out, or do you go for the big turkey?" Li Jiawei goes for the kill at the slimmest chance, she misses a lot but when she hits, its a grand slam. Yes, the opponent get killed spectacularly, but it's still just one point.

In investing, Jiawei's strategy can work if that grand slam is a 10 bagger, and you recover all your losses from the other 9 losing bets. This is how Venture Capital (VC) works. But my guess is you will have better luck with Feng's strategy. And this ties in with patience. Don't simply buy stuff on a spur. Cosco has dropped 50%, it is definitely a buy now! SPC dividend yield is 10%, buy! There are reasons why they dropped so much in the first place. Exercise patience, strike when your chances of success are very high, not just when it is hot.

Back to the matches, it occured to me that it should be quite unlikely whereby someone is down by 2 games and then comes back to win the next 3 games and win the match. Similarly, if you are lagging by even just 2 or 3 points and your opponent is at game/match point, it is quite difficult to win. Psychology is at work here. In order to counter this, a lot of mind training is needed. In this aspect, I would say the Singapore team was quite good, but the Koreans were better. Of course, world No.1 Zhang Yining, is probably the best at this.

In investing, your opponent is the market. Most of the time, you are down by 2 to 3 points bcos it is very hard to beat the market. 90% of all professional fund managers underperform the market. So you need to train your mind and be calm. Otherwise, emotions cloud everything and you make stupid mistakes. Trading rules some times help. E.g. stop loss levels, profit taking levels. Needless to say, right-sizing the bets is equally important. If your investment is too big and you are losing sleep, you need to scale it down.

Of course, most true blue value investors don't believe in trading rules and sizing of bets. They believe that if the stock is down, you should buy even more since it's cheaper now. And you should bet your house and car on it bcos that's how you maximize returns.