A Stunning and Painful Collapse

The story of Jean Van de Velde’s collapse is so sad. He had such a big smile, and everyone loves an underdog.

As an investor, this story reminds me to be cautious. It makes me risk averse. I always give a little thought to Van de Velde in the moments before I make a trade.

The scene was a golf course called Carnoustie. It was already known as one of the hardest golf courses on the professional circuit, but in 1999, for the British Open, they set up a monster.

The players whined to the cameras all week. They complained about the deep rough... and how the fairways were unrealistically narrow. They moaned about the wind and how the officials had spoiled the tournament. It was fun to see them suffering.

While every other player was knee deep in straw grass, hacking trenches across Scotland, an unknown Frenchman named Jean Van de Velde was playing the best golf of his life. His game was flawless. He led the tournament from Thursday morning to the Sunday afternoon, and by a good margin too.

They even started engraving his name on the trophy – the first Frenchman to win the cup since 1907.

But with 180 yards to the final flag, with a good lie and a three shot cushion, he made a tragic decision. He tried to take the tournament right then and there. Instead of hitting the easy shot up the fairway, he went for the flag.

The next moments were excruciating. His bid for glory clattered into the spectator stands, bounced off some rocks and settled down in the deep rough. His next shot rolled down a bank and into a stream in front of the green.

Imagine the drama: the tournament leader in freefall... and now he takes his shoes and socks off, rolls up his trousers, and wades into the water hazard with a pitching wedge! It would have been funny if it hadn’t been so tragic.

In the end, he decided not to play it from the water and took a penalty instead. It didn’t matter. His momentum was gone and he lost the tournament.

Every time I make a trade, I see Van de Velde, standing over his ball, wondering whether to play it safe or not. As I enter position size, my greed tells me to add an extra 100 shares or a few extra contracts.

But Van de Velde holds me back... and my holiday reading enforced the lesson.

I re-read the investment classic Market Wizards over the Christmas break. It’s a collection of interviews with top traders and investors.

“Undertrade, undertrade, undertrade,” says billionaire fund manager Bruce Kovner, one of Jack Schwager’s market wizards. “Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade three to five times too big.”

Two more “wizards” echo Kovner’s warning:

“Keep your bets small,” says Ed Seykota.

“Keeping your risk small and constant is absolutely critical,” says Larry Hite.

Today’s conclusion: When facing an important shot, keep the driver in the bag. Win the money game over the course of many rounds instead of one big shot.

Regards,

Tom Dyson