Sports and investing

The Winter Olympics was capped off last night by a thrilling overtime win by the Canadian hockey team over the US. The US managed to tie the game in the last 25 seconds of regular time. Just prior to this tying goal Canada hit 2 posts and missed a breakaway. After the missed breakaway I said to my wife "I've seen this story so many times....when 1 team fails to capitalize on so many good opportunities like this the other team will score on the first decent chance they get". Low and behold that's exactly what happened! Why does this happen so often? I think it has to do about the state of mind of both teams. For the team that misses great chances to finish off their opponents they may become demoralized, starting doubting themselves and switch from a “playing to win” attitude to a “playing not to lose” attitude. For the other team the opposite happens. The fact that they survived their opponent's vicious attack is like being given a second chance at life after a near death experience. Since they shouldn't even be in a position to still be able to actually win the game they feel they have nothing to lose and all to gain and as a result they play fearlessly with confidence. This shift in attitudes by both the winning and losing teams makes it more likely for the losing team to get an opportunity to tie the game and capitalize on it.

With investing/trading a similar shift in attitude often happens. Your mistakes and missed opportunities may cause you to lose confidence and "play tight"...you trade not to lose instead of trading to win and more often than not this results in further missed opportunities and losses. On the other hand, if you managed to catch a break or you get on a bit of a roll you tend to get a surge in confidence which puts you into "the zone" mentally where you able to see things more clearly and make the most of the opportunities that present themselves. Personally, I've been in the above 2 situations many times.

Here's another thing that you often see in sports. A team that has been the aggressor and has a small lead in a game will often change tactics to protect the lead i.e. play defensive even though the other team hasn't changed their tactics yet. This drives me crazy and is another example of playing not to lose instead of playing to win. The best defense is a good offense because there's no better defense than when you have control. The opposing team has essentially a zero chance of scoring when you are in possession of the puck, ball or whatever vs. a positive probability when the opposing team in possession. Therefore, dominating the play (without taking unnecessary risks such as having your defensemen pinch all the time) is the best defense as opposed to going into a defensive shell whereby you allow more opportunities for your opponent to have control and put pressure on you.

As a investor the above is similar to a situation where you have a winning stock/position that is still acting well, still below your target price and yet you decide to take a big chunk or all of the position off the table or put in a tight stop just because you are showing a nice gain and you don't want to see those gains slip away. This is playing unnecessary defense.... this is playing not to lose. Although you don't risk losing doing this unlike the dominating sports team that switches to playing defense, it is in a sense like losing because you obviously lose out on making more money but in addition to that, having that extra money would allow you to be even more offensive and win even more. Think of it this way... having more money in your account allows you to be more tolerant of paper losses on any of your future positions....it allows you more opportunity to act on your convictions i.e. play offense to make even more money and having more money is the best defense against future loses.

The offensive "playing to win" attitude as opposed to the defensive "playing not to lose" attitude is the correct way to go in my opinion. It's easier said than done and I've been guilty of going into the "playing not lose" mode many times and still do so. In addition, there's a fine line between being aggressive playing to win and being reckless and there will be times when you were correct in being aggressive and it backfires. That's going to happen sometimes because this is not a game of certainties. Like in poker, the correct play can still result in a loss. However, I believe in the long run thinking offensively with the "playing to win" attitude is the right attitude but you need to have ability, courage and mental fortitude (i.e. not getting discouraged by losing streaks) to do it successfully. Very few people have all these 3 traits.