What would you do if you had something coming at you at 110 km an hour and less than half a second to react?
Soccer goalkeepers saving penalty kicks face this situation often. While watching penalty kicks looks like a lot of fun for the audience, it’s often a tricky situation for the person facing the penalty i.e., the goalkeeper. He has to make a decision in less than a second and that too a decision on which the balance of his team’s fortunes hangs.
Penalty kicks are a great way to understand one of the biggest mistakes investors make. More on that later, but first let’s talk about the options in front of the goalkeeper saving the kick.
He has three choices available – He can dive left, dive right, or stays put.
As per research on penalty kicks, the players taking the kicks shoot one-third of the time at the middle of the goal, one-third of the time at the left, and one-third of the time at the right. Goalkeepers and their coaches surely know of this these days.
But what do most goalkeepers do?
Roughly 95% of the time, they dive left or right. And why?
Top goalkeepers said it just feels like they are at least making an effort when they dive. They feel like they’re being lazy if they just stay in the centre. It feels right to just do something, to make an effort. And it feels wrong to make the least effort i.e., stay put at the centre.
Staying put at the centre is surely the right thing to do, at least this is what research suggests. When the kick is to the centre, goalkeepers stop it about 60% of the time. When the kick is to the left, and the keeper dives left, his success rate falls to just below 30%. And when the kick if to the right, and the keeper dives to his right, his success rate is even worse at about 25%.
Now before you blame the goalkeepers for their foolishness despite knowing what works (as per probabilities) and what doesn’t, see the big mistake you may have made often in the past (and probably continue to make) as far as your stock investing is concerned.
That mistake is your bias towards action i.e., doing something. Anshul has written about this in his latticework of mental models series in August, but I thought this is worth reiterating given that I see a lot of people around trying to second guess the movement of Mr. Market and trying to be in the thick of action all the time.
Contrast this with a Warren Buffett quote I’ve come to agree with over the years –
Lethargy bordering on sloth remains the cornerstone of our investment style.
Or how Charlie Munger sums up his approach to investing –
We’ve got…discipline in avoiding just doing any damn thing just because you can’t stand inactivity.
Or the cause Blaise Pascal found for our biggest problems –
All of humanity’s problems stem from man’s inability to sit quietly in a room alone.
Being overactive as a goalkeeper or an investor is clearly crazy. Often staying put – not doing anything and instead sticking with your chosen investment process and high quality stocks – is the right thing to do.
Ankit Jain says
A very well written article explaining the importance of “PATIENCE” in the stock market.
Vishal Khandelwal says
Mihir Naik says
I completely agree on this. Even after reading so many books, articles and lecture notes. I have still have an urge to DO SOMETHING.
I was thinking to churn my portfolio today only. Because one of the “VALUE BUY” was not moving! This article once again made me revisit my investment decision journal and decided not to DO SOMETHING. 🙂
The problem with this analogy is that the shooter is not a lifeless body but a thinking human being. When they go on to take the shot, they would’ve been told the previous behaviour of the goalie.
If the goalkeeper always just stands his ground, then the shooter is NEVER going to shoot in the centre.
Vishal Khandelwal says
Thanks Billu! My point was not about NEVER acting, but to avoid the “Do Something Bias”, that leads to constant action.
Kulbir Lamba says
Sometimes not taking a decision is also a decision..
One of the best example of staying in center is in the movie Chak De India..There it was the last moment eye contact of the Goal keeper with Coach Kabir Khan.
What should be the guiding factor in investing for the same i.e staying put..?
Vishal – Thanks for sharing the info.
Just for info : In Movie ‘Chak de India’ Mr.Shah Rukh Khan knows exactly the importance of standing in the Center to protect the Goal.
See here .
Its our urge to take the risk which beats all the investment mistakes, it is important to take the step rather than wasting time thinking about the result..
R K Chandrashekar says
As the cliché goes, buy right and sit tight. Very often doing nothing is a sound decision in stock market investing, but human urge to do something is the bane of the unintelligent investor.
Vishal Khandelwal says
Very true, RKC. Thanks!
The line “He has three choices available – He can dive left, dive right, or stays put.” so aptly and subtly conveys the fact that doing nothing is as important as doing something when it comes to the stock market. Liquidity and patience are the two primary virtues that separate the men from the boys as far as investments go. The 2008 economic crisis was viewed as a crisis by most including the media but was perhaps viewed as a blessing in disguise by the super-investors like Warren Buffet who got many bargain deals at severely marked down prices. This shows that doing something followed by doing nothing for a long time is a wonderful trick for those who have the liquidity and the patience to sleep through it.
Very good message with a very good analogy.
Two items relevant to this post that I would like to share –
The stock market is a device for transferring money from the IMPATIENT to the PATIENT. -Warren Buffet
Pat Dorsey when being asked how he manages long term perspective when such short term gyrations in the markets said “The single best thing any investor can do is to not have a TV and a Bloomberg terminal in their office. I have to walk 50 feet down the hall to look at stock prices or check the news on our portfolio.”