Although it is taking place much later than usual this year, the 2020 Masters Tournament tees off in approximately two weeks. In addition to providing entertainment and a welcome distraction, the tournament provides a useful platform to better communicate your process and what it is you provide as an advisor. Some analogies prove to be more useful than others in this business, depending upon your client base, but golf and football are ubiquitous in this country. One need not have a single-digit handicap to understand the difference in the probabilities of hitting a green from 120 yards out in calm conditions, versus hitting the same green from 180 yards out, over water, and into the wind. In both cases a golf swing is required, but that is perhaps the only thing similar between these two scenarios.
A Lesson From Augusta National Golf Club (ANGC), It's Never All Roses
If the 13th hole at ANGC, home of the Masters, isn't the perfect golf hole, it is close. If it isn't the most strategic hole at ANGC, it is close. And if a hole that is aptly named "Azalea" isn't the most scenic on the golf course, you need to have a long talk with the course superintendent. Although we may need to lower our expectations slightly this year, ANGC is unique as a golf course in so many ways, and this is the week of the year that as avid golf fans we can do a little more than just sit back and watch in awe. The par 5's at Augusta, of which the 13th hole is one, are among the easiest holes on the course based upon scoring averages, and they are often the only holes that play under par. The 12th hole, by contrast, is the shortest hole on the course (listed at 155 yards) and is typically played over par by "the field." In fact, the historical stroke average for this hole is an above par 3.28. It is sometimes among the most difficult holes on the course in relation to par. But it is that first step off the slippery 12th green that concerns us today and will concern the best golfers in the world once the tournament begins, as this is when they head up to the final hole of what is affectionately referred to as "Amen Corner," the aforementioned 13th.
In terms of coming in under par, the 13th at Augusta is among the "easiest" holes, if not the easiest on the course, historically speaking. On average, the scoring on the 13th is under-par at 4.78 but that doesn't mean there aren't some scary moments for the pros. When players get to the 13th at Augusta in today's composite-fused, over-sized, extra-long, super-stiff, NASA approved driver world, it isn't the length of the hole that is daunting - almost every player in the field is capable of reaching the 510 yard par-5 in two strokes. Rather, it’s the combination of distance, a steeply sloping fairway, enough pine straw to choke a rake, and the most famous creek in golf (Rae's) protecting a green that makes the Rockies look flat, that makes the 13th one of the most strategic holes in golf.
On the one hand, the green is easily reachable in two for a scratch golfer (distance wise), if played well. On the other hand, some of the best golfers in the world have putted a ball off the green and into the creek (Tiger Woods in 2005). Before putting even comes into play, a good tee shot is mandatory for a golfer to even think about the aggressive second shot that could ultimately lead to an eagle on the 13th. A wayward drive that lands in the trees or the pine needles makes going for the green a treacherous proposition with a low probability for success (just don't tell that to Phil Mickelson). And even with a good tee shot, the second shot is one of pure strategy, a point driven home like a John Daly slap-shot back in 2007. That same year Tiger Woods had a remarkable eagle at 13 in the final round after hitting the green in two and caused perhaps the loudest roars of the tournament that year. Meanwhile the eventual winner, Zach Johnson, chose not to make an attempt to reach the green in two shots a single time in the tournament, and as the sun set on Master's Sunday he was the one slipping on a new green blazer. Or who could forget when Bubba Watson, back in 2014, went on to claim his second green jacket after gaining plenty of momentum on 13. He blasted his drive over the trees and onto the fairway, then pulled out a sand wedge to plop it over Rae's Creek and onto the green in two. He then birdied the hole. As you can see, number 13 at Augusta is quite simply a remarkable risk-reward hole that offers many ways to play it and many ways to fail.
It is this type of risk-reward decision that disciplined advisors are faced with each and every day and the key to repeatedly making rational, sound, decisions in this business is having rational sound indicators--and believing in them! A golfer knows his distance, his lie, the wind direction and whether he needs to play aggressively or not before he pulls a club. Some of that knowledge comes from his experience, the rest comes from his caddy. The average investor, by contrast, doesn't often recognize what hole we are playing, much less which way the wind is blowing or in which direction the green slopes. Without sound indications of where risk levels reside in the marketplace currently, how can any advisor truly feel comfortable telling Mr. Jones which club to pull out of the bag, much less how to swing?
Evaluating the "Lie"
If you do this long enough, you will encounter all types of markets. The worst thing to do is to abandon your game plan. Focus. It's not unlike golf. The front nine could go flawlessly, and at the turn, you hit an errant tee shot on 10, put the approach in the trap, and then three-putt for a bogey. If you play long enough, these types of holes will happen. The question is how do you handle the adversity? Focus. Focus on the fundamentals. Focus on the current shot, not the next eight holes.
When we look at the market indicators today, we see the equivalent of what PGA tour professionals (and a handful of amateurs) will see next week at the "Azalea" hole if they hit a reasonably good tee shot. We find a challenging second shot, but one in which there are many "right" answers thanks to the outcome of our good first shot off the tee. The S&P 500 SPX had a strong third quarter overall and sits atop the Dynamic Asset Level Investing (DALI) asset class rankings. However, the quarter ended on a weak note as each of the major indices were down in September and volatility has picked up once again in recent weeks. So, overall, the market is currently favoring domestic equity exposure, but in golf terms the terrain may be more akin to the rough than the fairway.
While there are many factors in our favor, it doesn't make the shot in front of us a cinch. There are still risks, so instead of being dead set on an eagle, be willing to accept a birdie or par when that’s all the course (or the market) is offering. It is critical to maintain perspective on what our "lie" is today in order to properly evaluate what the realistic options are for the next shot. One of the great additions to network coverage of golf on TV over the past few years has been the ability to eavesdrop on conversations between players and their caddy. It provides a great deal of insight into all of the factors that professionals at this level of the sport analyze before each swing of the club. Some caddies are more vocal and assertive than others.
This is the role of tools like DALI and the Asset Class Group Scores – as a capable caddy that complements your knowledge and experience. These tools won’t swing the club for you, but they will give you meaningful information about the playing conditions in the investment world and where our odds of success are greatest. Like a good caddy, the tools on the Nasdaq Dorsey Wright Research Platform offer guidance, advising you toward logical club selections based on present conditions, while you remain the ultimate decision-maker (and star of the show).
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