You Invest to Win the Game

You Invest to Win the Game

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Whether he gets another gig as an NFL coach or not, former New York Jets head coach, Herm Edwards, is immortalized thanks to a beer commercial that runs routinely during football season. The television ad uses footage from a real press conference that occurred during the 2002 season, a few days after the Jets lost to the Cleveland Browns to bring their record to 2-5. After being questioned by a reporter about the team’s motivation to play the upcoming week’s game given their poor start to the season, Coach Edwards condescendingly responded, “You play to win the game…HELLO?…You don’t play to just play it.”

As a financial advisor, I must admit that in moments of frustration I feel like paraphrasing Coach Edwards by telling clients, “You invest to win the game.” Although being a mild-mannered financial advisor instead of a quick-tempered football coach, it would definitely come out in a less derisive tone. The point of investing is about achieving your goals; in essence, you want your investments to help you win the game of life—to produce a good life, whatever that concept means to you. But that simple idea is based on a long-term time horizon, so it often loses out to myopia.

“Winning” in the Short-Term at the Expense of the Long-Term

Investors often get caught up in trying to “beat the market,” and that is fine to an extent. As with the concept of par in golf, it’s important to have a benchmark to know how you are doing. Or if you buy mutual funds or work with a wealth management firm, you obviously need some measure of comparison to gauge how your managers are faring with your money. For professional advisors, the frustration sets in when investors become obsessed with “winning” in the short-term at the expense of the long-term.

To illustrate my point, consider two mutual funds—the Legg Mason Value Trust Fund (LMVTX) and the Alger Spectra Fund (SPECX). From 1983 to 2010, the Legg Mason Value Trust Fund outperformed the S&P 500 Index in 20 of 28 years, including a 15-year streak of outperformance from 1991 to 2005. That’s a “winning” percentage of 71.4%, a record Coach Edwards would envy. Meanwhile, during the same period, the Alger Spectra Fund outperformed the S&P 500 Index in just 13 of 28 years, a “winning” percentage of 46.4%.

From this overly simplistic analysis, it would appear that Legg Mason is the superior fund, having beaten the market more often than Alger. Of course, calendar years are quite arbitrary in the sense that they represent random points in time that do not coincide with the time horizon that encompasses your financial goals. It may feel great to “win” in nearly three out of every four years, but that has little bearing on the success of your long-term financial goals.

While the Legg Mason Value Trust Fund was quite successful at beating the market on a yearly basis, it may come as a surprise that it actually lagged the market over this 28-year period. From 1983 to 2010, the fund gained 1,665.3% compared to 1,733.4% for the S&P 500 Index. Perhaps even more surprisingly, despite outperforming the market in less than half the years, the Alger Spectra Fund trounced both the market and the Legg Mason fund by gaining 2,382.9% during this 28-year period. Despite this significant degree of outperformance, perhaps the most surprising fact in all of this is that while the Legg Mason Value Trust Fund oversees nearly $4 billion in investor assets the Alger Spectra Fund holds less than $1 billion, evidence that the marketplace values consistency of performance over performance itself.

Focus on Winning the Game, not the Inning.

Football players don’t obsess with winning the second quarter, and baseball players don’t focus on winning the fourth inning. They play to win the game as should you as an investor. For investors, the “game” of life is typically a very long one. Finding investment strategies, funds, and managers that perform well over the long-term is the first key to winning. The second is to avoid the temptation to abandon ship if that strategy, fund, or manager underperforms for a brief period of time. Successful investing is not about consistency of performance; it’s about long-term results that take time and patience to achieve.

In closing, it is worth mentioning that the last time the New York Jets won the Super Bowl was in the 1968 season, a team coached by Weeb Ewbank who won in his sixth year at the helm. Since his retirement in 1973, the Jets have had 14 head coaches in 37 years, which may be just one reason they haven’t been back to the Super Bowl since. Or it could be the reason.

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