Golf and Growth Investing
A Play on Chinese Gaming
Staying Humble: Golf and Investing
I used to play golf regularly … once a year. I'd pick up the clubs every summer when my wife and I visited my father, a man who had the good sense to live far enough to the south to extend the golf season beyond four or five months of the year. I enjoyed the game and loved having the time with my Dad.
I'm not much of a golfer in terms of scoring; I've never broken 100 and probably never will. But when I was working in Boston, I had a co-worker who was both good at it and serious about it. He routinely shot in the 80s, and frequently made it into the 70s. Under his influence, I played much more often (sometimes four or five times a summer), bought a new club (a driver) to go along with the set of clubs I bought in 1964, and even made my way to the driving range occasionally.
But even with this exceptional (for me) level of commitment, I didn't improve much, and I've spent some time figuring out why. At the same time, I've always enjoyed playing, and I've tried to figure that out, as well, given my fairly low level of accomplishment. Here's what I've figured out.
Why I Don't Do Well
First, I don't play often enough. Golf is a physical and mental exercise, and building skill requires consistent, committed effort. Playing once a week (along with trips to the driving range) is probably a bare minimum. But golf is also expensive and time consuming, and I manage to fill the daylight hours of the few warm months that New England offers in a year with lawn and garden work, traveling, going to the beach and hanging out with friends. That doesn't leave many days free. If practice makes perfect, I'm highly unlikely to make much progress toward perfection.
Second, I don't take lessons. I've picked up lots of good tips from friends, occasional viewings of The Golf Channel, and leafing through golf magazines in doctors' and dentists' waiting rooms. But a brain full of maxims about how to play is no match for the insight of one professional who sees what you're doing wrong and knows how to make you better.
Third, golf demands that you do everything well. If you break down the game of golf, there are dozens of things that you have to do all at once (and time after time) to get the ball from the tee into the hole in a respectable fashion. Tee the ball up wrong, lift your head, pull the club back the wrong way … there are so many ways to go wrong that it's a miracle it ever works at all.
Why I Enjoy It
First, sometimes it works! On a good day, about two out of every five shots I hit do exactly what I want them to. On a really good day, those two shots will even happen on the same hole, allowing me to experience the illusion of competence for a few minutes. It's immensely satisfying.
Second, it's good to have a challenge. If I never do anything outside my comfort zone, I know that I don't have a chance to grow. And golf, which is a constant challenge even for gifted people who work very hard at it, will always be a tantalizing and humbling experience for a duffer like me.
Third, it's fun to hit things. I've played tennis, squash, softball, volleyball and lots of other sports, and I know that hitting things makes me feel good. So much of my work is intensely mental, and there's something about the sight of a well-struck golf ball soaring in the right direction that's good for the soul.
You're probably asking yourself why I'm blathering on about golf in the Cabot Wealth Advisory. And the answer is that I believe that golf and growth investing are incredibly similar in just about every imaginable way.
If you're going to be good at growth investing (or golf), you need to work at it. You need to spend time on it, take lessons in it and be prepared to learn all the little maxims and rules associated with it. And like golf, to be a really successful growth investor you need to do everything right; find stocks with good fundamentals, strong stories and attractive charts, pick the right time to buy, know when to average up in your holdings, and how to sell at the most advantageous time. And you need to know when the weather is so bad that it's not worth playing.
And also like golf, you won't always be successful. Sometimes you think you have the perfect stock and then its earnings report disappoints or the company gets investigated for backdating options or an analyst downgrades it. You'll get punished for buying too high or holding on too long in a decline. A mutual fund manager whose decisions are right 51% of the time is a hero in the industry. If you can't tolerate failure, you can't enjoy either golf or investing. Both will keep you humble.
And finally, growth investing, like golf can be a lot of fun. Getting everything right on a stock and watching its price climb the chart can give you a thrill that some people only get from a winning lottery ticket or having their scale tell them that they've lost five pounds. If the only thing investors cared about was never losing money, they'd all buy nothing but U.S. Treasury bonds.
You'll notice that I'm leaving out the similarity between golf and investing that involves sitting around drinking and lying about your results. Some things are better left unsaid.
My stock pick for today is a Chinese game company with a beautiful chart and a handsome dividend. It's Giant Interactive ( GA ) , an online gaming enterprise that offers both free-to-play and pay-to-play massively multiplayer online games that are played on networked game servers.
The company's 13 games include titles like ZT Online, ZT Online PTP, ZT Online Greed Edition, King of Kings III, My Sweetie, Giant Online, Dragon Soul, XT Online and The Golden Land. Giant makes money be selling prepaid game cards and game points that can be used within the games themselves. Games are also licensed to game operators in other countries, but in revenue terms, that's a 3% sideline.
Investors have known about China and its huge game-playing population for years, but there have always been obstacles to success. Sometimes it was the government's disapproval of time-wasting diversions, and sometimes it was companies' failure to keep their game lineups fresh.
But Giant Interactive's chart shows that investors are finding a lot to like. The company pays a nice dividend (forward annual yield is 5%) and GA trades at an attractive P/E ratio of just 9.
The stock traded near 3 in late 2011, but has rallied to a new multi-year high above 8. That stock price is too cheap (and the float of just 93 million shares is too small) to let many institutional investors take the kind of giant bites they prefer, but it's just fine for individual investors with a sense of adventure. If you can grab a small position in GA near 8, it should give you an interesting ride.
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report