Thought Across the Bow

There are lots of expletives thrown around the course during the (sometimes) gentlemanly sport of golf. But there is one word in particular that when said in earnest about another player isn't simply an insult, but an accusation. It's often mumbled quietly over beers after thousands of amateur tournaments each year. The word is Sandbagger.

If you're unfamiliar with golf gambling parlance, it refers to a competitor that systematically overstates his or her handicap. Over enough games an inflated handicap, even by a couple strokes, will mathematically ensure an edge, and the profits that come with it (if you’re properly gaming).

The Sandbagger may not always win, but just like an astute card counter at the blackjack table, tipping the odds in one's favour to a minor but meaningful amount over enough iterations, (other variables aside) can mathematically ensure a positive expected gambling outcome. So how do cheating golfers pull this off? The most unsophisticated method is to simply not post low scores into the handicapping system, or to fabricate higher scores. More savvy hustlers employ more advanced techniques. For instance, when a match doesn't matter part way through, or during a match that has minimal financial implications, the Sandbagger might decide to not line up a putt and maybe, just maybe miss it. Or hit a terrible bunker shot on purpose. Or pull the wrong club from 150 yards out. Even delaying entering a good score from the day before for today's big money match is common practice among this despised breed.

Tour pros don't worry much about this, they all play a gross (not net) game at their events. But if you think that Sandbagging is reserved simply for cash games at your local club, think again. In 1995 at the AT&T Pro-Am at Pebble Beach, the winners of the Pro-Am better ball component of the tournament were announced as Bruce Vaughan (being the pro) and Masashi Yamada. Vaughan played terribly, shooting 71, 75 and 79 through 54 holes. But in the world's most prestigious Pro-Am, the team score was enough to put them into the final round on Sunday, where they posted a team net score of 59. They were awarded their hardware and went their separate ways. A month or so later, while reading a golf magazine, USGA Rules expert Dean Knuth came across the tournament outcome. After making some calls, he determined that Yamada had been playing off a 15 handicap during the tournament. Some simple probability calculations had Knuth scratching his head. Yamada, off a 15 handicap, had shot or broken 79 on four consecutive days. This is statistically next to impossible for a 15. After a flurry of phone calls and faxes, it was determined that Yamada was in fact a mid-single digit handicapper (5) in Japan, and he and Vaughan were stripped of their title by Pebble Beach chairman Clint Eastwood. It turned out that the 72 year old Yamada was one of the better known amateurs in Japan (it didn't hurt he was a wealthy and connected real estate tycoon). David Duval and his agent/playing partner, Hughes Norton, were awarded the Pro-Am title over a month after the tournament finished.

"This comes pretty close to being a desecration," said Sandy Tatum, the former USGA president who won the event in 1961. "I'm only glad Bing didn't have to deal with it." (Bing Crosby used to be the tournament organizer).

Needless to say, Yamada was never invited back to the event.

Now and then you run across the opposite, a reverse sandbagger. This is the guy who claims he is a 5 handicap and proceeds to shoot a 93, claiming a "bad day". They are often referred to as having a 'vanity handicap'. The surface motives behind each of these behaviours is pretty clear: in the case of the Sandbagger it's to win more bets, for the reverse Sandbagger it's to maintain an unrealistic narrative about themselves as a golfer. The motivation to maintain a positive self narrative, to stoke an ego that cannot hold up to the smallest amount of pressure or critique comes at the cost of actually improving (not to mention being a human ATM). Having said that, among gamblers, no one really worries about the second type of golfer, after all, they are throwing away money (if they will actually lay a bet). But the implications of this type of thinking off the golf course can be very different.

From a psychological perspective, Sandbagging has been explained as "A self-presentational strategy involving the false prediction or feigned demonstration of inability." But what successful Sandbaggers know, and has been shown in studies (Baumeister, 1984), is that largely speaking, public expectations of success inhibit performance, while private expectations of success facilitate performance. The successful hustler is able to compartmentalize the two, and is able to feed off the subsequent self- presentation benefit by improving the perception of his recent performance. During the match, external observers had lowered expectations for the performance. The ‘bagger’ still thinks he is going to win, he is merely acting the part. The Sandbagger's wallet is not only made fatter, but in many cases his confidence swells as well, with the positive feedback coming from the social dynamics of the victory and apparent excellent play. This works until it doesn’t…

In sports we like to talk about 'clutch players', those that rise up in the biggest moments in the biggest events. Research shows that for the vast majority of professional athletes at the highest levels, increasing performance pressure (mainly through high observer expectations) leads to more instances of choking under pressure. Of course there are outliers that consistently thrive in these situations, and many of these figures are enshrined forever in Cooperstown, Canton, Springfield, St. Augustine, and Toronto.

The successful hustler has a method to his madness, and is typically pretty astute on knowing when to leave it all out there, and when to back off. They are audience and opponent manipulators. This is very different than what are known as 'self-handicappers' - the much more typical guys you come across that practice negative self-presentation before a match. He wants to avoid negative ability attributions that will come from a poor performance. Call it a very expensive ego hedge. Unlike the Sandbagger, the self-handicapper does not feel confident about the outcome of the match to such a degree that ego maintenance is more important than the actual game. The Sandbagger and the self-handicappers are very different animals.

Gambling aside, the strategy of sandbagging with the goal of (perceived or real) lowered public expectations are legendary in sports. Former Notre Dame football coach Lou Holtz used this technique to great effect. In 1993, before a stretch of games against tough opponents, he said "We're not a good enough football team to play the people we have to play". They were 5-0 at the time, ranked 4th in the country. They won the next 5 games handily, and nearly made it to the national championship after a last minute field goal by Boston College.

The problem comes from using this technique too often. For starters, if you're a billiards shark, golf Sandbagger or darts hustler, you start losing the ability to control your audience over time - which often is comprised of your potential future opponents (marks). No one wants a game with the Sandbagger, but everyone wants one against the guy with the vanity handicap. The negative self-presentation (the act) has the potential to bleed through into your actual confidence that you need to compete. If Holtz pulled this move every season or every week, no doubt its efficacy would wane. In gambling, only highly functioning sociopaths can indefinitely maintain this level of compartmentalization, assuming they can still get a game. Another cost is the potential reputation, perception or cartoon that one is trying to maintain in the long run. We've written previously about the value of multi-play games. The famous saying "Listen, if you can't spot the sucker in your first half hour at the table then you ARE the sucker" only has half the story right. Once you identify the sucker, you do everything you can to keep that person in the game. Insulting him, belittling him, laughing at his hands - that is a bad financial planning. You don't kill the golden goose.

Much has been said about corporate short term-ism. That is the propensity of public companies, investors and the oft vapid financial media to fixate on 'making the quarter' and 'beating the whisper'.

A recent study claims that "the amount of value destroyed by companies striving to hit earnings targets exceeds the value lost in high profile fraud cases". The core belief is that hitting earnings estimates builds credibility with the investing community and CFO's are willing to sacrifice long-term economic value to deliver increases in the company's stock price in the short run. "A surprisingly high 78 percent of the surveyed executives responded they would destroy economic value in exchange for smooth earnings. The executives believe that unpredictable earnings—as reflected in a missed earnings target or volatile earnings—command a higher risk premium. In short, CFOs argued that the system (that is, financial market pressures and overreactions) encourages decisions that at times destroys long-term value to meet earnings targets"

Various prescriptions to re-calibrate short-term-ism of corporate behaviour are very in vogue now. They are part of the G in ESG. Tweaking incentive structures and accounting allowances under the guise of corporate governance is #trending. Maybe that's the right place to start, maybe it's not. But it's kind of like fiddling with minute scoring rules in golf in an attempt to abolish sandbagging. Dean Knuth came up with system to mitigate the effects of sandbagging in golf tournaments. It works to some extent, but it leaves many other areas unaddressed. In Yamada's case, this was a post-hoc analysis by Knuth initiated only by his tournament win (and Knuth browsing through a golf magazine). Yamada had played the AT&T Pro-Am the year before his win using the same 15 handicap. He hadn't won in 1994, and no one ever brought up his sandbagging until the following year's victory. But his victory put an audit into motion. The problem is that these concepts of self narrative development (which related to corporate identity) are hard-wired into us. If a hustler wants an angle, regardless of the short-term consequences, he will find it. Or go down in flames trying.

Much here can be applied to investing. In the universe of equities I follow, my peers and I all know many of the companies that often take the short game of presentational strategies too far. A little bit of sandbagging the quarter is the norm. Mark it up to putting your best foot forward. "These guys always beat their quarter" is a nice little narrative that helps the sell side execute the rotation trade. Reverse sandbagging perpetually just comes off as being promotional and well, missing the financials consistently doesn’t look great. That's not to say it doesn’t happen (it does) and then attempts to rationalize it away look just like the guy with the vanity handicap making excuses. Many of the more extreme examples lead down a more dangerous path. Taking ‘normal’ things like securitization and leverage and redlining them to levels that can undermine the well being of the company/industry/economy. This is where Fast Eddie Felson has his thumbs broken. Epsilon Theory would call this poor meta-game management.

Doesn’t make the double bank shot any easier

Some of us have seen firsthand the intense amount of effort many management teams put into 'presentational strategies'. I've had CEOs ask me how they can best stay in a sub-index, or how they can manage their financials to 'get on the quant screens'(!). I've even heard "what sort of quarterly numbers or guidance would get the shorts scrambling to cover my stock?" My response is typically something like "Well, what are the tools at your disposal and how would you use them?" I am basically asking how far they are willing to go. From this, we can maybe, possibly, deduce if they are in fact likely to destroy long-term value for short-term gain. Then again, sometimes not. In any case, it pulls the curtain back a little bit on how they are thinking about their corporate self narrative.

The long-term costs of being the Sandbagger or the hustler are real. Want a gambling game with your pals at the club? Good luck if your cartoon is that of Fast Eddie Felson. Want to be invited to net play tournaments? Sorry. How much energy are you wasting trying to hustle a few people, and what are those opportunity costs? How will others extrapolate your golf/gambling cartoon to other walks of life? And the reverse sandbagger just looks like...well a loser that lacks self confidence. And that costs you too. It is much easier to spot the reverse Sandbagger than the Sandbagger. Don't be like Yamada, don't be like Fast Eddie, and don’t be the CFO explaining that the weather screwed up ANOTHER quarter. Play the meta-game correctly. Understand that in real life, when the long game is botched, the end looks more like that of Yamada's or Lehmann Brothers and less like Fast Eddie Felson's. Fast Eddie got a sequel in ‘The Color of Money’, but Yamada never got another invite to the AT&T Pro-Am.