As we emerge from the pandemic and navigate its aftermath, including rising inflation, a potentially slowing economy, and volatile markets, it’s helpful to remember how doing something we love helps us—particularly if that something brings structure and makes us better for it.
For me, tennis checks both boxes, and not just because it’s something I enjoy immensely. In many ways, it serves as a blueprint for how I approach life, and in turn, how I approach investing. The deeper you look at a demanding hobby—in this case, tennis—the richer the incredible lessons and insights you can glean. Sure, strategy, patience, and endurance apply to both tennis and investing; but there’s more to it than that.
What Tennis and Investing are NOT
Sports highlights generally feature that “wow” moment in a game. In the case of tennis, it’s that big unreturnable shot, or that incredible point with over 20 hits. The stark reality is, that is not the game of tennis. Ironically, the player with the most winners or who wins the longest points is often NOT the one who wins.
Likewise, financial news will celebrate that moonshot stock or that analyst who correctly predicted an economic event, such as recession. The stark reality is, picking those moonshots or timing those economic forecasts is not really the game of investing. Moonshots and predications are hard to get right consistently; chasing them usually causes more damage over time.
What are the real successes to tennis and investing?
Tennis and Investing are a Game of Errors: Minimize Them!
Even at the professional level, tennis is a game of errors. At the U.S. Open, for example, only a third of all points played end with a winning shot. The other two thirds end in—you guessed it—errors.
Errors result from a player missing a shot, and they can be forced or unforced. Forced errors are completely normal in tennis. Many times, a player makes an error because their opponent hits a shot they weren’t expecting. This is what keeps the game going and makes tennis exciting to watch.
It’s the unforced errors that doom players. These errors are self-inflicted—for example, trying to hit a big shot your opponent can’t get to, not hitting over the net with enough margin for error, or hitting shots too close to the lines. And when a player’s unforced errors start to creep into their game, they’re more likely to start losing.
Investing is also a game of errors, forced and unforced. Forced errors are the external events outside of our control. For example, a pandemic causes stocks to plummet overnight. Or Russia invades Ukraine, triggering fears of a global energy crisis.
Unforced errors are the mistakes investors make, either because they let their emotions get the better of them, or they simply don’t have a strategy to make good decisions.
If you’ve ever felt the impulse to sell all of your stocks and go to cash in a down market, then you’re familiar with unforced errors. Similarly, an unforced error can be paying excessive fees that eat away at your nest egg over time, buying bitcoin without understanding how cryptocurrencies work, or ignoring the tax implications of a large trade.
In both tennis and investing, there are elements we can’t control that will set us back from time to time. That’s okay. It’s the unforced errors—the mistakes we bring on ourselves—that make the difference between winning and losing in the end.
Tennis and Investing Require Great Situational Awareness: Observe and Adjust!
In tennis, competitors are always matching their strengths and weaknesses against one another. The best players see where the mismatches are and adjust their approach accordingly. Sometimes these adjustments take place in real time and ultimately provide the winning formula during a match.
At almost every level of the game, patterns of play, where one player has a favorite shot or series of shots they like to use, govern the match. Winning, then, comes down to recognizing these patterns and exploiting them for your benefit at the expense of the other player.
Investing requires the same level of awareness, alertness, and recognition. In the short term, markets can fluctuate wildly, changing the risk-reward trade-off for various investments. Meanwhile, asset classes tend to demonstrate patterns of performance over the long run.
While it’s impossible to predict performance in either case, investors can recognize trends in asset class behavior and adjust their approach accordingly. Having this situational awareness is often key to improving investment outcomes over time.
Tennis and Investing Are a Game of Focus: Know What Matters!
Tennis also requires you to focus and tune out all distractions. Indeed, players experience distractions every step of the way. Maybe it’s your opponent’s annoying antics. Or perhaps someone in the crowd is being unruly.
Yet these types of distractions are not nearly as insidious as the emotional distractions. Nerves, overconfidence, or a bad attitude can all derail even the most talented players. Ultimately, the players who can control their emotions—and who don’t let their emotions control them—are better prepared to compete at a high level.
Likewise, investors must tune out distractions, both internal and external. Because while there are many successful investment approaches, you can only be successful if you continually focus on what matters.
Headlines, talking heads, and even cocktail party chatter can all make you question your investment decisions. The key is knowing what’s relevant to your goals and tuning out the rest.
The Most Successful Mix It Up: Diversify!
Just as the strongest teams tend to have a deep bench of players, the strongest tennis players have a variety of tools at their disposal. In other words, they may have a dominant strategy they like to use, but they can also mix up their approach when necessary. Not only does this keep opponents guessing, but it also allows a player to adapt when their go-to strategy isn’t working.
In investing, we call this diversification. You’ll often hear diversification described as not putting all of your eggs in one basket. Because no matter how convicted you are in your company’s stock or a certain fund manager, there will come a time when that investment underperforms. And when it does, diversification helps you have other tools at your disposal to offset the decline.
Process Matters More than the Immediate Outcome: Follow the Plan!
Lastly, a tennis player’s process is far more important than the immediate outcome they achieve. Among the top ten tennis players in the world, the winner only wins 53% of a given game’s points. That means on average, the best players in the world lose 47% of available game points!
Tennis players regularly lose a string of points, and even a string of matches. But that doesn’t necessarily mean their process isn’t viable. It simply means that a player can’t control the outcome of any one point, just as an investor can’t control an investment’s returns every step of the way. What we can control is our process and our discipline to adhere to that process.