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Tommy Armour on Investing

Borrowing lessons from other fields is often a good way to reflect on our own accustomed ways of thinking and acting. Golf is a major source of important lessons on life—and for investors.

Tommy Armour was, during his era, the greatest teaching pro in golf. After turning pro in 1925, he won every major golf championship. Then, starting in 1929, he taught golf at Boca Raton. His 1953 book—still in print—is one of the best books on playing golf. It certainly has the best, most encouraging title: How to Play Your Best Golf All the Time. For those who absorb its lessons, Armour's book fulfills the title's promise.

As everyone who has ever played the Great Game knows, golf is life. So is investing. The great challenge in golf is not how to hit the ball or how to line up a putt or come out of a sand trap. The great challenge is to control the golfer—yourself. It's the same in investing: Know your capabilities and resources and play within them.

An obvious opportunity for investors would be to study with a great teacher like Armour and learn his “golf” lessons that are so applicable to investing, including this great overall summary: “Simplicity, concentration, and economy of effort have been the distinguishing features of every great player's methods, [while others] lost their way to glory by wandering in a mass of detail.”

Observers of Berkshire Hathaway, where so few investments are made in a typical year and investments are held so long, can be forgiven if they feel an urge to shout out, “Yes! Keep it up, Warren!” And investors in the American Funds would not be unjust to point out that this family of mutual funds—with the best long-term investment results—has low portfolio turnover. Index funds, which outperform most active managers, are designed to concentrate successfully on simplicity and economy of effort. All too many investors suffer the penalties of too much turnover.

As Armour says, “Action before thought is the ruination of most of your shots.” There is at least a good chance that institutional investors, with an astonishing high portfolio turnover, would benefit from more careful consideration before taking action and slowing the whole process down.

Indeed, Armour summarizes his years as a competitor, teacher, and student of the Great Game with a simple fact that undoubtedly will improve your scoring: “It is not solely the capacity to make great shots that makes champions, but the essential quality of making very few bad shots.” Imagine how investment performance could be improved by deleting any fund's three or four worst stocks. Like all great teachers, Armour repeats himself: “The way to win is by making fewer bad shots.” Fund managers might wisely devote more time and effort to removing their “stinker” stocks and to not losing.

Armour goes on to explain his meaning with somewhat different words: “Play the shot you've got the greatest chance of playing well and make the next shot easy.” Armour might change this advice a bit for investors to: Make the investment decision today that makes holding on for the long term easy.

Active investing by institutional investors where over 90% of “public transactions” are by institutions and a full 50% are by the 50 largest institutions, all of whom are well informed and competitive—leaves little margin for error. As Armour explains, “In major championship golf, the margin of error is narrow. It's wide in the club competitions between higher handicap players, but there, as well as in expert competitions, you'll note that what distinguishes the winner is that he made fewer bad strokes than the rest.”

We all know, even though public confessions are quite rare, that the main reason for selling stocks is inadequate research and judgment at the time of purchase, just as the principal cause of divorce is inadequate consideration before the wedding. Wouldn't we do better as investors if we concentrated our investments on those stocks that we have good reason to conclude from thorough research have the greatest chance of doing well over many, many years?

Armour may not have included the “money game” in the set of alternatives he had in mind when—half a century ago—he said of golf, “No other game is as exacting as golf in that so many specifications must be met to make a precision fit of implement and player,” but if he were revising his great book today, Armour might well include investing.

Investors continuously chasing “big winners” while repetitively underperforming the markets fit Armour's observation: “The fact that at least ninety percent of the millions of golfers score in the 90s or more than a stroke a hole over par is highly significant. It is a plain indication of their inherent limitations. Few of them are reconciled to their limitations.” (The last sentence may be particularly important for the “best and brightest” who have been streaming into investment management.) Armour goes on to say, “Fortunately, practically all of them can learn to reduce many of the faults that are preventing them from getting as close to par as nature will allow them.”

In golf, we play against ourselves. But in investing, we play against ourselves and against all comers. And the competitors coming after us are getting better and better all the time. So, now is a good time to learn Armour's immortal lessons over again. Competence in investing is not an absolute but a relative measure. And the relevant competition is getting so much stronger that most investment managers should recognize that, even if their absolute skills are improving, the grim reality of their own relative competence is surely and persistently fading.

Armour would want us to understand that the shrewd way to go forward is to take more time, have more knowledge and understanding, play to our strengths, invest in the ways we do best, and make investment decisions that make the next decision easy. As Armour said, “Every golfer scores better when he learns to play within the limits of his capabilities.” And in investing, our capabilities are always relative capabilities.