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Saturday, 09/23/2006 4:37:32 PM

Saturday, September 23, 2006 4:37:32 PM

Post# of 270437
The Inner Game Of Investing
Martin T. Sosnoff 08.31.06, 6:00 AM ET
http://www.forbes.com/markets/2006/08/30/sosnoff-inner-game-cx_mts_0831sosnoff.html

Martin Sosnoff



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Some 30 years ago I devoured Timothy Gallwey's book The Inner Game of Tennis. It helped my game some, and taught me patience as an investor as well.

Anyone who watches Roger Federer set up a passing shot after four or five baseline top spin returns knows where I'm coming from. The investment world is a purely existential game. You are what you do with no shoulda, coulda, woulda Hamlets allowed in--except as patsies.

Bob Wilson, a long-ago retired hedge fund operator, is remembered for shorting tons of Resorts International, the first casino licensed in Atlantic City. It ran the only legit crap game on the East Coast for a clientele then starved for action.

Resorts as a stock soared irrepressibly from single digits to near triple digits. Wilson, who was on a round-the-world sabbatical, perceived Resorts as a seedy, plain box reconditioned hotel left over from Atlantic City's hay day in the 1920s.

Wilson's broker kept tracking him with the bad news that Resorts was soaring. Bob, unflappable, just shorted more. I'm not sure whether he enjoyed his trip, but eventually Resorts crumbled as new operators got licensed and built casinos with updated amenities. Wilson understood the competitive dynamics of the gaming business and hopefully stayed the course.

Courage, patience and the tolerance for pain are seldom remarked personality traits of star money managers. You want someone who at times feels his very skin is bulletproof. It helps if you're right, too. President George W. Bush must understand all this by now.

Today, we all play on a fast court. The market is efficiently priced. Make a mistake on a stock and it opens down 10%, the going rate. Industry sectors move into and out of phase rapidly. The Big Board, like a powerful washing machine, is determined to whiten everything in its rumbling tank.

The market is your external opponent with many unknowables. Iffy interest rates and inflation and some signs of gross domestic product deceleration are surfacing. Institutional memory helps here. This kind of setting yields 0% to 5% rates of return for stocks and bonds. If you try for too many winners too early, you will lose the game.

Your internal opponent is you, yourself. Pogo had it right. Losing your concentration will bury you along with nervousness, self-doubt and self-condemnation. One of my old partners, Milton, used to say when a trade went against him, "The market owes me." This is the right attitude, whatever you trade in--beans, heating oil, Google (nasdaq: GOOG - news - people ) options or S&P 500 properties.

Wilson's shorting of Resorts never short-circuited his trip. His mind quietly focused on the eventual crumbling of the Resorts International edifice. Wilson would judge himself only when he unwound this trade. He played his spontaneous, concentrated game like a good tennis pro. Hackers concentrate on what lousy players they are after a weak serve. Then as Gallwey says, "He becomes what he thinks."

What about positive thinking? When I buy a stock, I believe it's going up at least 25% over 12 months. Gallwey calls this process nonjudgmental awareness. Without it you will never become a great investor. I have committed enough mistakes to fill a dumpster, but I block them and go on with the game. My resolve is weakening on offshore rig operators, so I sell them down. Schlumberger (nyse: SLB - news - people ) shines brighter, and I hang in.

Your market score is in percentage points, and nobody ever gets much more than a 70% grade. This is akin to a 1945 Chateau Lafite. Maybe the 2005 Bordeaux is the vintage of the century, but I've heard that phrase too often over the past 25 years. Nobody reaches perfection.

The market doesn't care about any of your trades, good or bad. You're just a code number in a broker's ledger book. Focus only on your results, not how you look. Nobody's watching. What kind of player are you? If all you want is a 7% return, maybe you buy single A preferred stocks and live happily ever after. Once you fret about missing Google, you've lost sight of your goal.

I'm focused on compounding my money aggressively, but it didn't stop me from buying the apparently stodgy Altria Group (nyse: MO - news - people ). Instinctively, you have to know when to go for the passing shot, executing it from a position of strength, not desperation.

Gallwey calls this "knowing your goal and taking objective interest in the results." When I'm competing as an equestrian, sometimes I choose to push my horse to the edge of self-destructing, but only if I'm confident the chances are better than 50% of getting away with it. The decision is based on your horse trusting you and effortlessly shifting into fifth gear.

Gallwey sums up his inner game "as the moment-to-moment effort to let go and stay centered in the here and now action which offers the real winning and losing and this game never ends." When action is born in worry and self-doubt, it is too late to be effective. Think of calmness, but not to the point of lack of concern. The ability to separate the real from the unreal and take sensible action is axiomatic.

I translate this to mean that when there is panic in the Street, it's time to step in and buy. It hasn't failed me going back to the Cuban missile crisis in 1962, the Volcker-induced recession meltdown in 1982 and, of course, Black Monday--but that's another story.

The best investors are those who see things as they are. Ghosts of the past and monsters of the future stand exorcised. I'm still learning.

One example: Everything I know about Google (never enough) suggests its intrinsic value today is at least $375, not the $550 many analysts project in their music sheets. I hold my inventory unperturbed. The day I'm proved wrong, I'll open the window, toss out Google and go on to something new--with no regrets.

Martin T. Sosnoff is chairman and founder of Atalanta/Sosnoff Capital, a private-investment management company with approximately $5 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street: Humble on Wall Street and Silent Investor, Silent Loser . He had been a columnist for many years at Forbes magazine and for three years at the New York Post . He owns personally and Atalanta Sosnoff Capital owns for clients the following stocks cited in this commentary: Google, Altria, Schlumberger.


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