Probably the biggest story in sport in the last year has been Lance Armstrong’s spectacular fall from grace. Armstrong had long been considered one of history’s greatest athletes, but recent events have shown huge flaws in his plan to be the world’s best; flaws that resulted in him losing almost everything that he set out to achieve.

It’s easy to criticise Armstrong but there are lessons for investors in his thinking and planning.

Lance Armstrong had one goal in life – he wanted to be the world’s best. We now know that he used illegal methods to achieve this goal but it all started with his thinking.
At some point in his career he decided that his strategy for becoming the world’s best was to dope. Choosing to cheat is a flaw not just because it is not the honest way of winning, but because the consequences of being caught are huge and usually life-impacting. They are however quite predictable and that’s the first lesson for investors.

Had Armstrong even considered this as a possibility, he would have contemplated the enormous backlash and consequences for him and his family. And had he done so, it is likely his actions may have been influenced. As he recently admitted, he would never have made a comeback.

Considering the alternative scenarios, in particular the worst case should be a part of every planning process. It helps to identify what’s certain and what’s uncertain, what’s controllable and what’s not, and then what options exist.

Almost all investment disasters are the result of too much concentration of resources in one asset (i.e. all the eggs in one basket) or too much leverage. Both would be avoided through a simple process of scenario evaluation.

What caused Armstrong to never contemplate this as a scenario is the second lesson. He thought he could control the variables and one of the key variables in his case (and the one that ultimately brought him down) was human behaviour. His plan was elaborate and complex and relied on those around him holding the line, potentially under extreme pressure. He thought he could control the people around him. After all he had done so throughout his life so he had experience.
He was overconfident and his overconfidence led to blind spots.

As human beings we are all susceptible to overconfidence. To be psychologically healthy, we have to be optimists. The future always seems better than the past and we are never realistic about our prospects. But optimism leads to overconfidence and overconfidence leads to very expensive lessons in the investment markets.

Lance’s third lesson for all of us is to know why we are doing what we are doing.
There was only one point during his interview with Oprah which gave us a glimpse of what is really important to him. Only one time where he showed some emotion – in fact where he couldn’t control his emotion.
It was when he spoke about the time when his 10 year old son had to defend his father to his friends. Imagine contemplating that your children may be teased about you, their father being a cheat. Instead of being proud to be admired by the world, at the age of 10 his son faces challenges which at best will leave massive emotional scars.

When he embarked on this strategy, he probably was after the admiration, respect and money that would come with winning. Ultimately he wanted to be loved by the masses but he hadn’t actually contemplated this at a conscious level. Had he done so, he may have wanted something different. Maybe he would have chosen his family’s wellbeing over his own. He certainly wouldn’t have chosen being an embarrassment to his children and mother.

Lesson three is therefore to contemplate the ultimate purpose of the plan, not the ‘doing’ and the ‘having’ but the ‘being’. Answer the questions ‘why?’ and ‘so what?’ What’s the ultimate purpose of the investment? If the returns are achieved, so what?

Many investors think that the objective of investing is to maximise returns. It should only ever be to optimise returns – to deliver the necessary return to produce the cash flow required within the acceptable risk tolerance. We can be thankful to Armstrong for at least reminding us how important it is to have a process before embarking upon a strategy – a process which takes into account the purpose, the blind spots and the possible scenarios.

Written by Justin Hooper, Managing Director and Financial Strategist

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