It’s 1985. Live AID captures 1 billion viewers and “new” Coke is introduced to the world and then pulled from the shelves 3 months later. Investors have mixed emotions as the US stock market hits 32 new record highs, but Starship’s We Built This City is put in heavy rotation. In the midst of this backdrop, Hollywood’s recycling program releases the fourth Rocky installment and pits Rocky against a technological marvel and his toughest opponent to date, Ivan Drago.
The film was panned by critics, winning five “Golden Raspberry” awards, including one for Brigitte Nielsen as Worst New Star. But what the Raspberry’s failed to notice was that outside of the clichés, buried within the plot is an important investing lesson. Which, when combined with one simple investing hack, can improve your investment returns dramatically by tens, if not hundreds of thousands of dollars.
“You will lose.”
Quick recap – Rocky Balboa is in Moscow, to avenge the death of his friend and comrade Apollo Creed against Russia’s top athlete, the steroid enhanced and personality devoid Ivan Drago. Rocky is a little older and softer since the original movie, but still possesses abundant mental toughness and uses a back to basics “Amish-style” training program that includes tree chopping and sled pulling.
Throughout Rocky and Drago’s epic 15 round fight, a strategy emerges that is the recipe for success, not only in movies like these,but also in investing.
THE STRATEGY
In the early rounds of the fight, Drago seems unstoppable. His raw power and powerful jabs overwhelm Rocky. But instead of going toe-to-toe against the power of his opponent, Rocky’s strategy is meant to wear Drago down over the entire 15 rounds of the fight. This strategy focuses on being able to withstand whatever Drago can hurl at him, as well as deliver a series of consistent punches to Drago’s body, vs. a big knock-out punch.
Over to course of the fight, Rocky’s discipline and patience wears down his opponent as well as the Russian fans, who are so impressed they begin chanting his name in the final round. In the end, Rocky defeats Drago and delivers a closing speech highlighting how how we can all change.A few years later Berlin Wall comes down and the Cold War ends. All is right in the world.
“I must break you.”
Did Rocky IV help to end Russian communism? We’ll never know for sure, but Rocky’s fight strategy is sound.
If this match-up were akin to investing, it would be represented as a traditional conservative portfolio vs a high-octane growth portfolio over 15 years. The first portfolio would be diversified and hold bluechip quality stocks and defensive fixed income investments, while the other would be heavily concentrated in momentum and high growth companies.
| Port 1 | Rocky | Port 2 | Drago | |
|---|---|---|---|---|
| Year | Return (%) | Portfolio Value ($) | Return (%) | Portfolio Value ($) |
| 1 | 5 | 10,500 | 30 | 13,000 |
| 2 | 5 | 11,025 | 30 | 16,900 |
| 3 | 10 | 12,128 | 30 | 21,970 |
| 4 | 8 | 13,098 | -45 | 12,084 |
| 5 | 10 | 14,407 | 20 | 14,500 |
| 6 | 5 | 15,128 | 15 | 16,675 |
| 7 | 10 | 16,641 | 30 | 21,687 |
| 8 | 5 | 17, 473 | -15 | 18,426 |
| 9 | 10 | 19,220 | 20 | 22,111 |
| 10 | 5 | 20,181 | 5 | 23,217 |
| 11 | 8 | 21,795 | -15 | 19,734 |
| 12 | 12 | 24,411 | -15 | 16,774 |
| 13 | 10 | 26,852 | 15 | 19,290 |
| 14 | 7 | 28,732 | -5 | 18,326 |
| 15 | 10 | 31,605 | 20 | 21,991 |
| Average | 8% | 8% |
THE FIGHT
For the first few years, Portfolio 2 would come out swinging, initially outperforming Portfolio 1, and skyrocketing its overall portfolio value. During this initial period,the temptation for the holder of Portfolio 1 to change course and adjust their portfolio would be overwhelming.
But chasing hot performance and going for the knock-out punch can be extremely dangerous, particularly if you join the party late, miss the big gains and hit a period of strong under-performance (very common). Staying disciplined and mentally tough is paramount to a success in the long term.
In the example above, over the long-term the conservative portfolio catches and matches the average return of the growth portfolio, even after its spectacular performance in the first 3 years. More importantly, in the end, even though both portfolios averaged an 8% annual return, the conservative portfolio actually generates more money than the growth portfolio.
THE HACK
With the same arithmetic mean, consistent returns will beat more volatile ones.
In this example, even though both portfolios generated an average 8% annual return, Portfolio 1 ended up with $31,604 while Portfolio 2 only ended up with $21,991. That’s a difference of over 44%. The big swings in performance hurt Portfolio 2 over the long term.
“This man is not human”
In the investment world, Rocky’s strategy would be considered very boring to many investors. The real-life Drago’s we face are neighbours who have made money on paper in hot stocks before (this technology,cannabis, etc) or co-workers who bought Apple back in 2008. The media also can be tough opponents, preferring to highlight big winners (and eventual losers) and remind us of all the gains we’ve missed out on.
In reality, successful investing is less about excitement and more about the entire 15 rounds.
BE LIKE ROCKY
- Take small hits instead of knock out punches
- Protect yourself
- Be disciplined and stick to your strategy
For the record, Dolph Lundgren is no dummy. He graduated with a Master’s Degree in Chemical Engineering and was awarded a Fulbright Scholarship to MIT before focusing on “acting” (Note: he was not awarded any acting scholarships). Sylvester Stallone also has a reported IQ of 160 (also no acting scholarships). But even smart individuals can become greedy and/or or panic as the market moves up and down. Building a conservative portfolio and staying disciplined wins every time.