Sweet Spot Speculation

Perspectives, by Mark Robertson, Managing Partner


Posted on May 1st, 2005


Where the maximum power is generated with the least vibration.

The “Sweet Spot” is where the maximum power is generated with the least vibration when striking another object. The red areas represent the “Sweet Spot” of the objects shown.

The development of the Tin Cup model portfolio included a discipline of staying within a specified target range for stock selections. In a sense, this provided a protective barrier from temptation, those times when we buy stocks with huge expected returns, only to be disappointed with subsequent underperformance. Stocks have a “Sweet Spot” and those who disregard it often awaken the humility gods for a reminder that “when things seem to be too-good-to-be-true, they’re generally too good to be true.”

Well-Struck by Roy “Tin Cup” McAvoy

One of my favorite movies is Tin Cup starring Kevin Costner, Rene Russo, Don Johnson and Cheech Marin. Costner stars as a washed up golf pro working at a driving range who tries to qualify for the U.S. Open in order to win the heart of his arch rival’s girlfriend. In this scene, Costner is giving a golf lesson to Rene Russo while his friends, including Cheech Marin, spy from inside the diner.

Kevin Costner: Something like that.

Rene Russo: You know…look… I tend to process things verbally, ­so do you think you could break down into words how you just did that?

Costner: (chuckling) You mean, “What is the golf swing by Roy McAvoy?” I tend to think of the golf swing as a poem.

Cheech Marin: (peeking through window blinds) Oh… he’s doing that poetry thing again!

Costner: The critical opening phrase of this poem will always be the grip… as the hands unite to form a single unit by the simple overlap of the — pinky finger. Lowly and slowly the club head is led back and pulled into position not by the hands, but by the body which turns away from the target, shifting weight to the right side without shifting balance. Tempo is everything, perfection unattainable as the body coils now to the top of the swing, there’s a slight hesitation — a little nod to the gods…

Russo: A, a nod to the gods???

Costner: Yeah… to the gods. That he is fallible. Perfection is unattainable and now the weight begins shifting back to the left pulled by the powers inside the earth. It’s alive — this swing — a living sculpture and down through contact, always down, striking the ball crisply with character. A tuning fork goes off in your heart. Such a pure feeling as the well-struck golf shot.

Convergence with Reality

While conducting the Tin Cup study and building the model portfolio, I was impressed by the number of times that the method selected stocks that were actually chosen in one of my investment clubs or personal portfolios. The results of our family investment club mirrored the results of the Tin Cup portfolio from 1995-2000.

In hindsight, the portfolios would have benefitted from the selling — and buying — discipline. Avoiding the temptation of seemingly high-return stocks, like ADC Telecommunications after it had dropped from $49 to $11, would have been even more prudent. ADCT is now at $2 or so. I can still recall the elevated projected annual returns for ADCT at the time of purchase with stars in my eyes. The stars I see now are from the opportunity-to-learn-something lumps I received instead.

By limiting the target range to 10 percentage points above VLMAP, I believe that temptation can be subdued. The “Sweet Spot” is that point, or range within which a particular object functions at its maximum level of efficiency and output. In the case of stock selection, it just might be the place where heartbreak is avoided and pure feeling attained.

Mark

Mark Robertson

Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.

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