Back in October, many of us in the Bay Area were celebrating the San Francisco Giants’ World Series win. Game seven of the World Series may have happened a few months ago, but today I’d like you to rewind your memory to that night at Kauffman Stadium in Kansas City. So far, the most exciting story of the series is the performance of the Giants’ starting pitcher, Madison Bumgarner. He’s already posted two wins in this series, including a complete game shutout two days earlier. He has come into game seven on two days’ rest to protect the Giants’ one-run lead in the fifth inning. The question everyone is asking: “Will he be able to continue his dominant pitching performance?”
Bumgarner makes it to the bottom of the ninth inning having given up only one hit. The Giants are holding on to their one-run lead. With two outs in the bottom of the ninth, Royals left fielder Alex Gordon hits a ball to the outfield. It is misplayed by Giants center fielder Gregor Blanco. Left fielder Juan Perez attempts to pick up the ball and kicks it away before he is able to collect the ball and make the throw to the cutout man, Brandon Crawford. With all that has happened, the TV viewers now see the ball thrown back to the infield. Alex Gordon is safe at third. Everyone wonders why Gordon did not try to score and tie the game. What was the Royals’ third-base coach, Mike Jirschele, thinking? Did he just ruin the Royals’ dream ending to a dream season?
Catcher Salvador Perez is waiting to hit after Alex Gordon. In the baseball world, everyone knows that there are seven more ways to score from third base than from second base. And I am sure Mike is reminding himself that Perez is the only Royal to have hit and scored a run against Bumgarner with his game one solo home run!
Alas, for the Royals, Perez pops up a foul ball that is caught by Giants third baseman Pablo Sandoval, ending the game, the series and the season for major league baseball. The Giants celebrate, while Alex Gordon takes a lonely walk back to the dugout.
We Learn More When We Lose
In the world of sports, we learn significantly more about ourselves when we lose. Questions always arise and people will second-guess their decisions and strategy. Should Jirschele have sent Gordon home? What were the risks? We know well the reward. Upon a review of the play from a different angle, we see the ball already in Crawford’s glove just as Gordon is rounding third. Crawford would have easily thrown Gordon out at the plate! However, in hindsight, having the knowledge that Perez is going to pop out, why not send him? Crawford has to make a good throw; the Giants’ catcher, Buster Posey, has to catch the ball and then make a tag on Gordon, not drop the ball and keep out of the base path. Wow, it seems that it is well worth the risk!
Except that the ball will arrive 20 feet ahead of Gordon. And who really knows whether Perez is going to pop up? In life, we never get to know the next day’s market results and then get to trade today. Hindsight bias is very dangerous to investors who think they can “feel” or “know” the next big trend. The result is second-guessing advice that is given to them. Their “feelings,” although unexpressed or even mentioned to an advisor, become reality after the fact.
No one in San Francisco, or even in Kansas City, is questioning Mike Jirschele. Baseball minds (and those of good investment advisors) know that the correct decision was made and would be the correct decision every time! In fact, the only people I know who strongly feel Gordon should have tried to score are Los Angeles Dodgers fans. Why? Two reasons: It’s not their money (or in this case, their game to lose) and they hate the Giants!
I recently met with a client to review the year-to-date results contrasted with the client’s overall investment strategy. When he saw the 1.12% net investment return, he exclaimed, “I could have gotten that at the bank!” My response was that he would have gotten a higher return if his money was “at the bank.” The real concern with that comment is a failure on my part to educate the client regarding his long-term investment strategy.
“Hindsight bias is very dangerous to investors who think they can ‘feel’ the next big trend.”
My client came on board late in 2013. He was upset that his previous advisor had kept him out of the market in 2013, hence the switch to me. Stocks in 2013 returned north of 30%. Stocks so far have returned very little in 2014. Was his move to stocks in 2014 a bad choice? Was his portfolio in bonds in 2013 a bad choice? Of course, in hindsight some of our decisions could be changed to take advantage of what the market would do in the future. There is no one alive who has that information. “Feelings,” “hunches” or thoughts of “would have, could have, should have” come from the mouths of those who frequent the gaming tables of Las Vegas. Your financial success is not about gambling or trying to second-guess what could have been done.
We continue to advise our clients to adopt a carefully crafted investment policy statement (IPS) that considers risks and rewards suitable to their individual circumstances. The real key to a successful financial future is to follow your plan, ignore the “noise” and enjoy the opportunities life has to offer.