CINCINNATI BUSINESS COURIER
March 24 – 30, 1986
INVESTMENTS
Charles Vaughan
WINNING
Winning is not everything, it’s the only thing, according to a late, great football coach/philosopher. It seems that a lot of people subscribe to that philosophy. However, many of those who do aren’t really sure how to define winning or how it is accomplished. It would be foolhardy of me to presume to answer such time honored mysteries.
If winning means outperforming everyone else, in the financial arena it would be virtually impossible. First, we would have to wait until we found out how all the other players did to make a comparison. Next we would have to have a clear definition of when the game ended so that we could declare the winner. More important, such a definition would mean that there would be only one winner and all the rest would be losers.
Perhaps a more acceptable approach would be to make winning a personal matter. In that event comparison with performance standards could be made only to facilitate the establishment of reasonable targets. Using that concept, we could all be winners as long as we achieve positive results toward fulfilling our own financial goals.
This idea of winning seems to be more reasonable for most investors than a Super Bowl mindset that forces all participants to pursue questionable performance at the expense of longterm personal goals. If we carry the sports analogy a step farther, three distinct images emerge.
First, in any sporting event there is the need for definition of the purpose of the contest and a delineation of the rules. For the individual investor, this is comparable to setting longterm financial goals and defining safety and liquidity constraints.
Second, is the need for a coach who determines how to best employ the resources of the team. In the investment world this equates with an investor’s use of personal and professional advisory and administrative ability to implement tax planning and investment decisions.
Third, and most often neglected, is the need for a game plan. In the investment arena this is vital. Many investors get so wrapped up in the pursuit of profit that they forget some of the most important elements of success. Every worthwhile game plan has two important aspects, offense and defense.
It is meaningless to earn huge profits for five years if a blunder in year six could wipe out the entire portfolio. A good defense consists of protection from bad judgment as well as outright fraud. The best defense is to ask questions before committing dollars.
Remember that there is usually a correlation between risk and reward. An investment that promises a huge return probably has a substantial degree of risk. If it sounds too good to be true, it probably is. The best defense is a well designed financial plan that calls for a balanced and diversified approach.
In many ways the offensive strategy is similar to the defense. That may sound strange, but the secret to profitable investing is shifting funds into those areas where the risk-reward ratio is most favorable. An important point to keep in mind is that it is bottom line return that is important.
That means that costs and tax consequences must be factored into the equation before funds are committed. Gains can be entered by the use of leverage, but care must be taken to keep risks to acceptable levels.
Timing may be the most important element of successful investing. Those securities which appreciated the most in the past year or so may not be the leaders this year. For example, a stock that rose from 25 to 50 last year may have more difficulty moving to 100 this year to duplicate the feat.
If we accept the realistic assumption that winning in a financial sense is really a personal matter, then we can avoid the very dangerous and self defeating “contest mentality.” This will allow us to set our own goals and to take advantage of promising investments as they arise instead of bemoaning lost opportunities. Progress can then be measured, as it should, against our plans for current and future lifestyle needs rather than against some mythical standards. We win if we progress toward our own goals.