What can we learn about our finances from the game of Cricket? Actually, a lot. There are seven factors that influence how successful a Cricket player will be and these same seven factors apply to investing and your finances as well.
The Seven Factors
The most important factors for Cricket players are the following:
- Speed / Quickness, Balance & Coordination
- Motivation & Self Confidence, Skill and Technique
- Strength & Power, Reaction Time
- Coping with Pressure Situations
- Analytic & Tactical Ability
- Flexibility, Agility
- Body Size and Composition, Aerobic Endurance.
I think the only item that clearly does not apply to finances is body size. However, I would argue that endurance is extremely important in budgeting and investing. Let’s take a look at how each of these factors applies to finance!
Balance is a key aspect of any investment strategy. Even for those who practice Extreme Investing like me need to have balance. There is a great deal of research on how balancing your portfolio properly actually has a greater long-term impact on investment success than the individual choices you make in stock picking. Check out one article about that here. People often overlook the systematic risk that the broader asset class inherently applies to their individual investment. For instance, they may select a really great stock, but then get hammered by a broad market sell-off.
The importance of balance is one of the fundamental building blocks of modern portfolio theory. How are you thinking about balance in your own portfolio?
The concept of balance certainly applies to the investing concept of diversification. By diversifying your portfolio you are avoiding the imbalance of having all your holdings in any one vehicle or even one asset class. This should involve a consideration of stocks, real estate, alternative investments like paintings, collectibles, wine and other things, bonds (but I hate bonds), commodities, foreign currency, and other investments.
You will probably notice that the list I provided contains things that are not in your portfolio. But many people find that including raw land, paintings, commodities like gold, platinum, and silver, foreign currency, and bonds in their portfolios provides balance. Consider this, a declining stock market in the United States may have no impact on the value of a painting by a renowned Japanese artist.
Within those various asset classes it also makes sense to balance your investments geographically. This is helpful when there is a war, natural disaster, or health scare that impacts one particular country. If you own stock indices in Europe, Brazil, India, and China for instance, you would have less exposure to a terrorist attack in any one of those countries. Are you balanced?
As an aside, I would include hedging your portfolio with futures and options as a great way to find balance.
Motivation is key in many aspects of life, not least in the area of our finances. The importance of setting goals should be emphasized here because setting goals can help with motivation. Whenever I struggle with motivation I often look at my goals to get me charged up again.
The Cricket player must be motivated to deal with the difficulties of a long test match. But the goal of winning keeps him motivated! For many of our investments, the payoff is not immediate but rather over a long period of time – so this aligns quite well with how a test match player must think about their efforts. The exertions of each play are part of the longer test match.
Reaction time is sometimes critical. I think immediately of identity theft and credit scores. If your financial identity is compromised you need quick reaction time. You can’t have someone else posing as you and ruining your credit for months on end. For those who have Discover credit cards you have protection against this. Many major credit cards have this. But one of the keys to defending against identity theft and fraudulent charges is immediate reporting.
Reaction time can also be important during extreme market events. I don’t advocate trying to time the market and pick the times to buy and sell large portions of your portfolio. But there may be times where a quick reaction will allow you to hedge your portfolio at an advantageous level. Or you may be able to purchase part of an IPO which will likely create value. There are many times when quick reaction is important. In order to have a quick reaction you must have a level of cash on hand to take advantage of the opportunity. Keep your powder dry!
Coping with Pressure Situations
This is a big one. Cricket is full of pressure situations. The stakes are high and there is very little room for error. Just like in Cricket, investing can also have these situations. It is important to have a game plan for these situations as well as advisors to consult. If the markets you invest in are experiencing a high degree of volatility is it is very important to stick to your long-term plan. Executing your plan under pressure will mean the difference between achieving great long-term returns and losing your shirt!
Having an advisor is helpful as well. This could be your spouse, a respected family member, or an investment professional. Having an advisor to help deal with pressure situations is a good way to avoid making a bad decision due to fear or anxiety.
This one is interesting. It is very helpful to have analytical ability when managing your own finances. It probably isn’t important to be a CPA or have a professional finance background. But having basic analytical abilities will help in observing patterns in the markets wherein you invest.
You may also want to get analysis from professionals to supplement your own analysis and keep you from having blind spots. I enjoy reading the analysis of those who disagree with me in order to make sure I am considering all aspects of the situation.
Be careful though. Much of what passes for “analysis” in the financial press is merely parroting the opinions of others, stirring up fear, or chasing a fad. These are things that help journalists make their stories popular and sell advertisements. They aren’t necessarily going to be helpful in making long-term portfolio decisions!
It is important to be flexible and agile. When something isn’t working, be honest with yourself and consider moving to a different investment. It is always good to learn new things and apply your knowledge to your investment decisions.
This does not mean that you should trade frequently. Trading in and out of investments is a sure way to lose your money over the long-term. But I do advocate portfolio rebalancing and accountability. One thing that I do is report my Net Worth as a way to help me stay flexible. I recently found that when I reported out on my Net Worth that my holdings looked out of balance. This led me to change my portfolio allocation to a more reasonable posture.
Endurance is of paramount importance! Just as a cricket player needs to be able to endure hours and hours of physical strain, the investor needs to deal with years and years of uncertainty. Investing in stocks over the long-term can result in years of poor portfolio returns. All of this will most likely be followed by years of great portfolio returns as the market reverts back to the mean average annual return.
If you don’t have endurance with your investments, you will sell them when they decline. This is the worst possible scenario because you will end up taking a negative return and missing out on the positive return when the market comes back. Endurance needs to be held in balance with agility because there are times when changing investments is the right move to make.
How are you doing with these key traits of a successful investor (and cricket player) ?