The playbook (The Financial Athlete #90)

“If you don’t know where you’re going, you could wind up someplace else.” – Yogi Berra

The football playbook lays out the plans on how to execute plays. It details only “DO’s”, not “DON’Ts”. The more practice put into particular plays, the sharper the execution. The playbook is not a case of “the more (plays), the better”. Working off of too many plays in a playbook causes confusion. Better to limit offensive football plays to about 20.

Investors should also have a playbook for investing. Most don’t. That’s why so many of them chase performance or listen to a random analyst touting stocks. A playbook should not be complicated. It should be straightforward and not dumb-downed.

I was very proud of my old investing playbook because it could work like a charm in a normal market. I called it the “Yin and Yang of investing”. On the Yin side, I invested in real estate for passive income. On the Yang side, I invested in small-cap, growth stocks purchased at a perceived reasonable price. When the market prices of these stocks appreciated considerably, I would invest half of the capital gains into more real estate for passive income. The other half was invested into other growth stocks. Of course, this was supposed to go on and on, but it was no match against the liquidity crisis of 2008, which hit like a tsunami wave. Suddenly, some passive income dried up from commercial real estate and the stock prices of the “growth companies” plummeted. My playbook failed on account of insufficient cash to take advantage of deep discounts on various classes of assets and also insufficient interest income from bonds.

A well thought-out investing playbook prepares the investor with contingency plans for a wide spectrum of possible future scenarios. This is its greatest value. My revised playbook now includes contingency plans for both hyperinflation and deflation.

Lastly, an investing playbook should be coupled with a playbook on financial planning, which includes life insurance, living trusts, cash reserve for emergencies, and retirement accounts.


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