Roger Federer gave an excellent graduation speech at Dartmouth Graduation recently.
This part surprised me:
In tennis, perfection is impossible... In the 1,526 singles matches I played in my career, I won almost 80% of those matches... Now, I have a question for all of you... what percentage of the POINTS do you think I won in those? matches?
Only 54%.
In other words, even the highest ranked tennis players win barely more than half of the points they play.
When you lose every second point, on average, you learn not to focus on every shot.
You teach yourself to think: Okay, I committed a double fault. It's just a point.
Well, I got to the net and they passed me again. It's just a point.
Federer won 80% of his matches but only 54% of the points in those matches.
Crazy, right?
One of the most dominant tennis players of all time won most of his matches, but not always in dominant fashion. Rather, these were slight short-term advantages that were compounded by long-term consistency.
Of course, when I heard this part of the speech, my financial brain immediately went to the stock market.1
Federer's victory and points percentage are basically the same as the stock market!
I am always beating the drum about the fact that the stock market is essentially a blowout in the short term but has a wonderful rate of profit in the long term.
On a daily basis for the last 100 years or so, the S&P 500 has been stable or up about 54% of the time, as has Federer:
Surprisingly, the average down day is a little worse than the average up day.
Despite an average daily return of just three basis points, the stock market capitalization over longer time horizons has been impressive.
These daily figures refer to price only (i.e. excluding dividends). Looking at price alone, the S&P 500 has risen nearly 39,000% since 1927.
The average dividend yield at that time was just 3.7%. With dividends reinvested, the total return since 1927 jumps to a staggering 1.3 million percent.
I know no one has that long a time horizon, but the benefits of compounding can be noticeable if you can stay on the sidelines.
And the win rate increases the further you go:
If Federer gave up every time he lost a point, a tiebreaker or a set, he wouldn't have 20 Grand Slam titles.
If too much importance is placed on short-term results in the stock market, it is difficult to be a successful investor.
Minor advantages that accumulate over long time horizons can work wonders.
Other readings:
The stock market is not a casino
1For some reason, tennis analogies pack a punch when it comes to investing. I have used Andre Agassi and Charlie Ellis Examples of tennis in the past.
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