Remedying the Situation
Roger Federer gave a commencement speech at Dartmouth a few days ago. It was a 25-minute speech divided into three major lessons.
Federer is the all-time greatest at Wimbledon, the tennis capital.
At the finals in 2008, he came to center court as winner of the five previous Wimbledon Grand Slams and was hunting a record 6th consecutive title.
On the other side of the net stood Rafael Nadal, the greatest clay player to ever live. He has won the Roland-Garos French Open a record 14 times!
Nadal had never won Wimbledon prior to the match in 2008. In what many consider the greatest tennis match of all time, Nadal beat Federer in five sets including three tiebreakers.
As Federer told the 2024 class graduates in his speech, he knew right then that he could never break that record of six titles.
He also added that in a tennis tournament, only one player walks away with the trophy while dozens of others walk away empty-handed.
This harsh reality of winners and losers wasn’t his most important lesson of the day. He dished out some statistics as well: he played 1,526 singles matches in his career while winning 80% of them.
What struck me most is that Roger Federer, arguably the second-greatest tennis player ever, has a winning career average of only 54%!
This means that he has basically won every other point!
His message was to bury the point lost in the past and not focus on it at all!
When I analyze my investment portfolio, I am sometimes shocked by the companies that I have been a shareholder of that have underperformed the index and are still gaining or have utterly failed.
Even with these awful results, the entirety of the portfolio is still crushing the index over time.
How? How is it possible to get many things wrong and still pull off a feat that most investors never reach, which is to generate positive returns over time?
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THE FUND APPROACH
What Federer said is essentially like saying that each point is a stock and around half of his stocks were losers, yet he was able to find great stocks at crucial points. Because of that, it’s like he won more Grand Slams than all but two other players and reached a net worth of $550M before his 45th birthday.
A match is like a fund filled with stocks, and by diversifying and choosing which stocks (points) matter more, you’re able to crush it.
How is this done in practice? How do you mitigate the fact you (and I) will make plenty of mistakes in the markets?
- Position sizing: this is a MUST. I limit my positions to a maximum of 10% of my portfolio!
- Cutting losses: I limit each individual loss to 2% of my entire portfolio.
How do I marry the two?
If I invest 6% of my portfolio in a new stock, I sell it if it dips more than 33% because 33% of 6% is 2%.
Example: Portfolio size = $100,000. Tesla position of 6% = $6,000. If TSLA falls by 33%, I cut the loss to $2,000, which is 2% of the portfolio.
- Bad timing or bad business: if TSLA stock falls by 20% and you cut the loss, will you never buy TSLA again?
The answer depends on the question before it: is it a bad business or was my timing bad?
By following these three rules, you and I will go a long way in reducing the risk of our imperfect thinking.
None of us will be right all the time. By deciding before ever becoming shareholders of a business that we won’t be dragged down by more than 2% of our portfolio no matter what, we give ourselves the chance to see another day.
Best Regards,
PortfolioWealthGlobal.com
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