How to Find the Right Investment Strategy for You – Gridiron Style

by Darrin Donnelly on October 23, 2012

I’ve always believed there is a direct parallel between success in sports and success in the stock market.

For example, to succeed in the stock market, one must first find the investment strategy that is right for them.  This is very similar to the way a football coach chooses the right offense for the team he is coaching.

In football, there’s no ONE right strategy that guarantees success.  Especially at the college and high school levels, coaches win championships using a variety of offensive systems.  Some prefer to grind it out with a conservative running game while others like to spread it out with a wide open passing attack.  Both strategies work.  Both styles win lots of games when utilized correctly.

The key for coaches is to find the proven system that best fits their player personnel and their own personality.

I think it’s interesting to note some parallels between the most successful offenses in football and the most successful investment strategies implemented in the stock market.

Below, I’ve showcased the investment world’s equivalent to the football world’s most well-known offenses.  You just might find that the style that would best fit you as a football coach fits you best as an investor.

 

PRO STYLE – TREND TRADING

As the name indicates, the “pro style” offense is the system most popular with the pros.  Most NFL coaches implement this offense with slight variations based on their player personnel.

The pro style offense relies on balance.  If a defense shuts down the running game, the offense will emphasize the passing game – and vice versa.

The pro style offense is also heavily-dependent on a smart and disciplined quarterback who stays calm and cool under pressure.  It requires a QB who doesn’t get easily rattled or rely on emotional responses.

Trend trading (or trend following) is the trading approach that is most popular among professional traders these days.  The Darvas System, for example, is a trend trading strategy.  Regardless of the specific strategy, the philosophy behind trend trading is simply to catch the market’s (or an individual stock’s) overall trend and ride the trend to profits until the trend ends.

Like the pro style offense, trend trading is a balanced approach.  Traders are not biased to being long or short.  If the market’s going up, they go long.  If the market’s going down, they go short.  They can profit regardless of which direction Mr. Market decides to go.

Also like the pro style offense, trend trading is heavily dependent on a DISCIPLINED trader who can set aside his emotions and make decisions in a calm and systematic manner.

 

THE SPREAD OFFENSE – SWING TRADING

The spread offense has taken the college football world by storm over the past decade.  It’s exciting and action-packed.  It relies on spreading the field out and getting the ball to your offense’s fastest and most-athletic players in one-on-one situations.

Despite its “flashy” nature and pass-heavy style that fans love to watch, the spread offense is successful because of its short, high-percentage passes.  While fans remember the few big plays that come out of this offense each game, the spread succeeds by methodically passing its way down the field with five yards here, four yards there, etc.  Every once in a while, it busts a huge 50-yard touchdown, but the majority of the offense relies on fast and short pick-ups.

The same is true for swing trading.  Instead of riding trends that last weeks or months, swing traders make fast trades that usually last just a few days.  Every so often, a swing trade scores a big 20% profit, but for the most part, a swing trader succeeds with fast gains of 1-3% at a time.  They pile up their smaller profits month after month.

Also like the spread offense, which relies on high-percentage pass plays, swing traders rely on high-percentage trades.  To be successful, swing traders usually need to have a winning percentage above 50% on their trades.  (This may sound obvious, but trend traders, on the other hand, can be successful with a winning percentage in the 30-40% range because their losing trades are much smaller than their winning trades.)

 

RUN & SHOOT – DAY TRADING

In the 1990s, the Run & Shoot offense was all the rage.  Colleges and high schools across the nation started implementing this pass-heavy offense in hopes of racking up 70 points-a-game.  A few NFL teams even got in on the fun.  The offense was fun to watch and caught defenses off guard with its “playground style” of adapting on the fly.

However, defenses quickly caught up with this new-fangled offense.  Today, despite many coaches trying, only a select few are able to consistently win with this offense and the days of scoring 80 or 90 points-a-game are gone.

Similarly, day trading is an action-packed strategy that, at one point, seemed to be unstoppable.  During the market bubble of the late 1990s, sensational stories of day traders becoming millionaires from home brought in a surge of eager students hoping to learn their keys to success.  They all wanted to learn how to make their fortune trading in and out of stocks with super-fast trades held for less than a day.

Like the Run & Shoot offense, the market quickly adapted to the latest day-trading strategies and profit margins became slimmer and slimmer.  Today, only a very small percentage of those who try make good money day trading.  That doesn’t mean one CAN’T be successful with day trading, it simply means that it’s much more difficult than one would believe based on some of the sensational success stories of the past.

 

THE WISHBONE – VALUE INVESTING

There was a time when the Wishbone offense was the most popular offense used by coaches at the high school and college levels.  Championships were abundant with this offensive strategy in the 1970s and 1980s.  This run-heavy offense relied on a very conservative strategy that was focused first and foremost on not making mistakes (turning the ball over or losing yardage) and would also benefit from the occasional breakaway run that resulted in a long touchdown.

The Wishbone offense, philosophically, could not be stopped.  Its triple-option approach gave the QB three different options for moving the football on every play.  Assuming he chose right, the offense would rack up at least four or five yards on every play.  If he chose wrong, the play would be stopped quickly, but the damage would be minimal.

Statistically, the Wishbone offense remains the most successful offensive system in the history of college football.  However, few teams still run it largely because fans think it’s boring to watch.  It’s not as exciting to see four-yard-runs on every play when the team down the road is passing the ball all over the field.

Like the Wishbone offense, value investing has been statistically proven to consistently outperform the market.  The more historical testing that gets done, the more proof we have that very simple value investing strategies beat the overall market again and again.

However, also like the Wishbone offense, value investing is seen by many as boring and “old fashioned.”  It requires patience and a long-term view.  In our adrenaline-fueled culture that is constantly seeking excitement and speed, value investing is often ignored.

Value investors, like Wishbone coaches, don’t mind being ignored.  They simply continue to rack up victories with a low-key and reliable system.

 

So there you have it, the football equivalent of the most popular investment strategies being implemented today.

The important thing to remember is that there is no single “Holy Grail” system that works all the time.  Each of these systems will work if executed properly.  There may be periods where one system works better than another, but fortunes have been made using each of them.

The key is to find the system that fits you best.

Also, like the coach who can adapt his strategy from season to season based on the strengths and weaknesses of his players, you don’t have to choose one and only one strategy to use for the rest of your investing days.  As long as you keep separate accounts, feel free to implement more than one strategy.

Just make sure you don’t mix and match in the same account.  You’d never expect to see a coach switch from the spread offense to the Wishbone offense after a few negative plays.  In the same way, you never want to let a swing trade turn into a value investment.  You must know your primary objective heading into the season – or trade – and stick with it.

 

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