By Gary Brooks, CFP®
On a drive to Portland recently, I caught up on a backlog of podcasts*. One was a conversation with Aswath Damodaran, a professor of finance at New York University (NYU), who is mostly known as an expert in establishing valuation of companies.
Damodaran and Masters in Business host Barry Ritholtz spent over an hour discussing views on investing, some very technical. There was one simple comment, however, that stuck with me as a story to help the average investor think about investing decisions. It’s a tennis comparison.
Damodaran explained that most people should invest the way they hit a backhand shot in tennis, not like a forehand shot.
Since the backhand is generally a weaker stroke, most players simply focus on getting it back across the net. Whereas with the forehand, players can be tempted to try and do too much with their opportunity. They might play to their strength and try to hit a particularly hard shot, try to place it in a specific spot, maybe try to create some side spin to make the ball more difficult to return cleanly or hit a lob or drop shot. When players try to get too cute with their forehand choices, they are more likely to commit an unforced error and sacrifice a point to their opponent.
Investment markets can be similar. Often, when investors try to make too specific of an investment or do something they may not be well positioned to pull off – despite their hope it will turn out well – problems tend to find them.
The basic tenets of prudent investment management can take you a long way toward financial freedom: diversify; rebalance; keep your costs low; commit to saving and have a plan and purpose for the money. Establish yourself with first investment principles long before you spend your time perfecting the cross-court winner on the line.
*I rarely listen to the radio. There are so many interesting podcasts – educational and entertaining – that I think are a great use of commuting time. If you’re interested, here are my favorites:
- Freakonomics Radio – Steven Dubner extends the book series with counter-intuitive ways to think about economics, human nature, etc.
- Hidden Brain – NPR’s Shankar Vedantam combines science and storytelling to help understand human behavior.
- How I Built This – Guy Raz of NPR interviews company founders.
- Masters in Business – Barry Ritholtz has had several of the most prominent investment thinkers as guests.
- Invest Like the Best – Patrick O’Shaugnessy interviews an interesting collection of people in and outside of investing.
- Revisionist History – Malcolm Gladwell shares funky stories and underappreciated angles.
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