Football Strategies for a Financial Win
Gerry Cameron - Jun 25, 2019
There are a number of ways to explain investment theories, and I’ve read quite a few. But one that has stuck with me through the years is the theory that you should manage your portfolio like a football coach.
There are a number of ways to explain investment theories, and I’ve read quite a few. But one that has stuck with me through the years is the theory that you should manage your portfolio like a football coach. In other words, have a game plan. When the markets are climbing, going your way, take full advantage of the situation and throw your offense on the field by investing heavily in growth stocks to score as many points as possible. And when the markets turn against you, and they will, send your defense onto the field by taking profits and sitting on cash. It’s a great analogy. So many people keep their offense on the field during a market correction, only to give back all their gains. It happens too often. But in all fairness, investing comes down to making decisions, especially sell decisions in good times and bad times.
For most investors, buying stocks is straight forward, but selling them is more of a challenge, more so when selling results in a loss. Why? Well for starters, emotion gets in the way. Selling at a loss is a blow to your ego because it’s confirming that you’ve screwed up. And for that reason, people tend to hold onto their losers, hoping that the stock will recover. But they should be fearing that the stock can further decline in price. When a coach is standing on the sidelines and sees his quarterback missing plays, fumbling the ball or throwing interceptions, he’s not going to keep him in the game hoping he’s going to turn it around by the fourth quarter. He’s going to make the decision to pull the quarterback and go with his second quarterback to win the game. Especially when the championship game is on the line.
A few years ago, a friend told me that when a stock in his portfolio is dropping in price, he will cut his losses and move the proceeds to one of his stocks that is actually moving in the right direction, going up in price. It makes perfect sense. Most investors feel they have to find new opportunities, a new stock to replace the loser. But there is no reason to when you have a winner – a strong performer in your portfolio with a position that can be increased without jeopardizing the overall portfolio’s returns. The strategy is simple: eliminate emotion and let your winners run.
A money manager once told me that he’ll buy a stock in increments to hold a position in his portfolio. For example, if he likes XYZ stock with plans to buy 1000 shares, he might start off by buying 500 shares, then another 250 shares, and then the last 250 shares to hold the 1000 share position of the company. Each purchase was made when benchmarks were hit, confirming his reasons to buy the stock were correct. The strategy saves him the stress from fully investing in a stock in one purchase that could possibly turn against him. He also sells his positions in increments to save himself from selling his full position, only to watch it continue to climb after he has gotten out.
A football coach follows his playbook that he has put together for the game – plays that address every game situation to increase his chances for a win. As an investor, you should always have a plan in place to meet changing market conditions, to have strategies in place to become a successful investor.