Staying on Course: Investing Lessons from Rally Racing

October 19, 2022

I took a crash course (minus the crashing) on rally racing a few years ago.1 We started learning techniques in wide-open areas, graduated to higher speeds, and complex steering through a maze of cones. By the end, we were bombing through the woods down narrow tree-lined paths, making split-second decisions with a co-driver informing us of the upcoming terrain.

Three techniques have stuck with me and can help improve investor behavior on the road to better investing outcomes.

Target Fixation

When trying to avoid an object (cone, deer, tree, pond, etc.), the last thing you should do is stare at the object you are barreling towards.

But your brain wants you to do the opposite – our minds naturally nudge us to focus on the things we want to avoid. Willpower is necessary to overcome this force. We must overpower this natural reaction to maintain attention on the direction we want to steer the vehicle.

What are investors doing right now? They are fixated on the decline in the market. Fears are pushing investors to focus on the wrong thing, leading them to make rash decisions in hopes of avoiding the hazard. The behavioral economics term for this is Action Bias. When we invest, we have the urge to take consistent actions because we believe acting will improve our returns.

Yet, these actions steer investors to make decisions that attempt to alleviate loss in the short term but can exacerbate worse long-term outcomes (e.g., selling to cash at the bottom but not getting in before a subsequent rebound).

You cannot control inflation, the Federal Reserve, or the market. However, you can manage your reaction. Remain focused on the path you want to travel and avoid steering towards the hazard.

Speed Up

When approaching an unavoidable pothole, what is your inclination? I imagine many of us would apply the brakes and slow down before hitting the pothole.

This reaction is wrong. The front suspension compresses under braking, sending more impact shock to the vehicle and ourselves.

The correct approach is to apply the gas right before hitting the pothole. This shifts the weight towards the vehicle's rear, unloading the front suspension and minimizing the pothole's impact. Try this the next time you approach a pothole.² It will take all your willpower to accelerate, but the payoff is a smoother ride.

When investors see the potholes, they tend to brake. When you see the vehicle ahead of you braking for a pothole, the social pressure pushes you to follow suit and brake. When the market is fearful, it’s hard not to get swept up.

Warren Buffet said it best, “Be fearful when others are greedy, and greedy when others are fearful.” Yet it’s spectacularly hard to go against the grain. Even when you have cash, you also need the confidence to invest when all signals are screaming to do the opposite. Short-term pain can be the recipe for significant long-term gain. Adding delayed gratification to your repertoire is one trait of an excellent investor.

Co-Pilot

In rallying, every driver has a co-driver whose sole job is to navigate, which means reading a map out loud in coded language, enabling the driver to prepare for the next maneuver seconds before they reach that point in the course. Without the co-driver, the driver would be slowed significantly and at greater risk of disaster.

Few individual sports are without a coach or team behind the star athlete. Rallying, Formula 1, Tennis, Golf, etc. A person or group supports the best in the world.

Investing is no different. An otherwise solitary activity is often much easier and enjoyable when you have a formal plan and partner. Thoughts and ideas are exchanged. Emotions and actions are kept in check. Buffet has Charlie Munger. You have me. Let’s avoid the dangers and win the race.

Your Next

So, what can you do to best navigate these fearful times? Remember the lessons of rally racing.

1. Focus on where you want to go and not what you are trying to avoid.
2. Remember that when you feel like braking, it is likely the right time to accelerate.
3. And as far as investing partners, communicate with your co-pilot. I’m always available to talk about the path ahead.

- Peter Egolf