Market Lessons From the Masters

 | Apr 10, 2013 | 11:00 AM EDT
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The Masters Golf Tournament kicks off tomorrow, and Tuesday was the main day for player interviews. This is when players tell the public how they feel about the course, the state of their golf game and how they feel about their chances of contending. Last night I listened to some of these interviews of today's top golf pros, similar to the way I examine investment picks from today's top investors. To listen to how these golfers think about playing the 18 divine holes of Augusta National is to get a lesson in how to navigate the hills and valleys and undulations of the market.

Phil Michelson talked about the opportunities and limitations that each hole provides, depending on whether you are a right-handed or left-handed golfer. So here you have one the best players in the game, a hall of fame golfer, readily admitting that there will be holes that he will have to avoid betting on. Investors take heed: A pro knows when push his limits but more importantly knows precisely when to avoid situations that could put him in the hazard.

Yesterday I touched on the demise of J.C. Penney (JCP). Shares are trading near $14 and clearly appear attractive, given what J.C. Penney was capable of earning in the past. For the year ended Jan 28, 2011, J.C. Penney generated more than $800 million in earnings before interest and taxes. Today the company has an enterprise value of $5 billion. As attractive as the potential opportunity seems, I know that Penney is extremely difficult to play and that I need to understand its twists and turns before taking a big swing. J.C. Penney arguably had one of the most talented retailers at the helm, Ron Johnson, yet even he allowed his past successes to cloud his judgment and cause him to commit a very basic but deadly mistake: alienating customers.

Tiger Woods talked about minimizing mistakes. Accept the fact that par is an excellent score on many holes. Doing so eliminates bogeys but more so double bogeys, which are deadly to a tour pro. A world-class investor operates the same way, and this is perhaps the most important lesson of all: A great investor first thinks about not losing money, while more investors are first thinking about how to make money. Understanding one's limitations and accepting that you don't know everything about everything will go a long way in eliminating double bogeys. 

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