Wednesday, December 22, 2010

Investing Lessons from John Wooden

For those who don't know who John Wooden was, he was the legendary coach of the UCLA men's basketball program during their unprecedented string of 10 titles in 12 years during the 60's and 70's.  He is considered to be among the greatest coaches in any sport.  He is revered not just for his approach to coaching basketball, but his approach to life.  Recently, he has been in the news as the University of Connecticut women's basketball time has just eclipsed his team's record for consecutive wins.  Today, I happened to be listening to some sorts talk show where they were discussing Wooden's basketball legacy.  The host made an interesting point; he said that if Coach Wooden were coaching today, he might have been fired before he had a chance to bring home all of those titles to UCLA.

John Wooden fired?  Are you crazy?!  Well, maybe not.

When Wooden first took over the Bruins basketball program, he had some early success.  In his first four seasons, UCLA won their conference and advanced to the NCAA tournament twice (back then fewer teams were invited which is why didn't make the tourney all four years).  However, after a string of successes, UCLA had a five year drought of not winning their conference and not advancing to the tournament.  In this day and age of instant gratification, there is a good chance that a coach of a previously successful program had a drought like that would no longer be coaching.

Consider Steve Lavin, who coached the same UCLA basketball team from 1996 until 2003.  In his first six seasons, his teams all had winning seasons and he made the NCAA tournament every year.  However, in his seventh year he had the temerity to only win 10 games.  He was fired after his first losing season.

Now you might say that you can't compare the two situations because times were different then.  That's exactly my point.  Today we live in an always-on, instant gratification society where we are always looking for success right now.  The phrase "good things come to those who wait" doesn't seem to resonate these days.

What does this all have to do with investing?  Plenty!

Today's financial world is dominated by short term thinking.  Many investors is inflicted with "short-term-itis".  Many people cast aside investing for the long term in search of that get rich quick scheme.  First it was the Internet stocks.  Next it was flipping real estate.  Today it is precious metals.  Nobody wants to have to wait 20 or 30 years to reap the rewards.  Many want the rewards today.

However, just as the tortoise beat the hare in that famous fable, slow and steady investing wins the race:

1. Over the long term, buying and holding stocks is a solid investment

I have shown that over any 30 year period from 1950 to the present, buying and holding the S&P 500 will make you a consistent 7% per year.  Yes, you might have years like 2008 where you lose 40%, but if you gave up and sold your stocks after that loss, you would have missed out on the 30% gain in 2009 and the nearly 20% gain so far in 2010.  It is possible that if UCLA had "sold" John Wooden during his lean years that they never would have reaped the benefit of those 10 championships.

2. Over time, the power of compound interest will grow you money exponentially

If you invested $1,000 in an S&P 500 index fund, you will "only" have $1,070 after one year.  However, after 30 years you will have $7,612.25.  7.6 times return on investment is a lot better than what you will probably earn on the latest investment fad.  It took 15 years for John Wooden to win his first title at UCLA, but once he won the titles just kept on coming!

3. If you stay the course, you are less likely to make emotional decisions

The general rule of thumb for investors is to buy low and sell high.  However, how many investors truly follow this advice?  When the markets were at their lowest in March, 2008, how many people were buying and how many were selling?  I think you can guess the answer.  Many people forgot that the stock market can be volatile in short term, but you can't let that volatility spook you.  In order to take advantage of the fact that stocks are going to grow in the long term, you have to stick with them through these dark periods.  Those who remembered this wisdom of not making rash decisions were rewarded by a strong bull market.  Those who sold at the market's low point are probably still kicking themselves.

The lesson here is that long term thinking trumps short term thinking every time.  Just like the way that UCLA stuck with a winner like John Wooden, sometimes you have to stick with an investment plan for the long term.  If it is sound plan that you believe in, it is almost always better to stay the course.

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