Boring is better

Buffett's rule number one, in investing and football

With the NFL season kicking off this week, I thought I’d republish a brief football-related excerpt from Low Risk Rules. In this version, I’m actually able to add the video described in the text. Because of the attached clips, you may need to click through to read it on your browser.

Incidentally, after I wrote this, and just days following the publication of the book, Marion Barber III, the star of this clip, passed away at the tragically young age of 38. His memory lives on in electric clips like the one featured below.

---

In a 2007 matchup between the Dallas Cowboys and the heavily favored New England Patriots, Dallas held a tenuous four-point lead in the second half. The Cowboys were backed up first and twenty on their own ten-yard line. Not ideal, but they would have at least three chances to gain the twenty yards needed for a first down and to dig themselves out of a hole.

Running back Marion Barber took a handoff from quarterback Tony Romo about five yards behind the line of scrimmage, and immediately ran into a scrum on the left side. Most runners would have simply pushed their way into the scrum and taken what they could get before they were inevitably dragged down.

But not Marion the Barbarian. Rather than trying to push through, he spun his way away from a tackler. Almost immediately, two more Patriot defenders were on top of him, now pushed back to his own goal line. He was in danger of being tackled in the end zone, giving up a crucial two points to the Patriots.

Breaking the first tackle, he evaded the second by running backwards farther into the end zone, while giving himself enough room to break free and run to the right side of the field. He proceeded to break three more tackles on his way out of the end zone as he picked up speed and ran along the right sideline.

Barber was finally pushed out of bounds at the ten-yard line, pretty much where the ball was originally snapped.

Net gain on the play: two yards, according to official statistics, but in reality it looked like he was lucky to have gained a yard.

It was a wild sequence. The comments on the YouTube clip include “top 10 greatest runs in NFL history,” “the greatest 29 second video ever,” and “unquestionably my favorite play in NFL history.”

It was a high-risk play by Barber. Had he gone down where he met the initial scrum, the Cowboys would have lost minimal yardage. His attempt to make something out of nothing, to run back into the end zone looking for space to run, was a risky one because he could have given up a safety, gifting the Patriots two critical points and handing the ball back to their offense. Thrilling to watch, but risky. His coaches were almost certainly not pleased.

Lots of drama.

Lots of excitement.

But essentially no progress towards the goal of moving the Cowboys towards a scoring play.

So it is with stock market volatility.

The most volatile stocks attract the headlines, and therefore a disproportionate amount of novice investor attention. But playing in these stocks is risky, and while it might be exciting, they won’t necessarily help you progress towards your goal. Worse, you risk losing significant ground in moving closer to your objective.

In an effort to make something out of nothing, Barber risked handing the Patriots two points (bringing them to within a field goal of winning) and giving their high-powered offense (led by Tom Brady) the ball back. But in that split second, Barber decided to break the rules, primarily based on his belief in himself and his ability to evade the Patriots’ defenders. You might say that his decision was somewhat… entrepreneurial.

And while the entrepreneur can take those risks—hell, the entrepreneur often has no choice in the matter—the investor needs to behave more like the coach on the sideline, evaluating the odds and acting accordingly. If you watch the clip of Barber fighting his way back to the line of scrimmage, you see his sheer determination—he gave it everything he had and willed himself out of that end zone.

The entrepreneur does this routinely, but the investor cannot. Remember Warren Buffett’s famous quote: “Rule number one: Never lose money. Rule number two: Never forget rule number one.” It means that if you can choose between multiple options, you should always err towards the one that bears less risk of permanent loss.

Volatility is, in fact, a sort of tax on your returns. Because if you lose 10 percent, a subsequent 10 percent gain won’t get you back to breakeven. That would require a gain of 11.1 percent.

The secret to Buffett’s long-term investment record is not that he consistently outperforms the market in good years, but rather that he loses less than the market in bad years. That alone can result in long-term outperformance.

So the risk with volatile portfolios is that you can dig yourself a hole that is very difficult to recover from.

Now back to that electric Marion Barber run. If you have a portfolio made up of those kinds of plays, it will be very exciting and fun to watch. But you’ll occasionally take a big loss. You’ll give up a safety. You’ll be lucky to make it back to the line of scrimmage. And only rarely will you break that kind of run for a touchdown.

Don’t get lost focusing on the volatility. Sure, it can be exciting, but the only number that matters is the yards gained on the play. If your objective is to win, in football or in investing, boring is better.