The Loser’s Game: Why Being Conservative Can Help You Win At Investing

Throughout my whole life I’ve always enjoyed playing tennis. I loved being competitive, and I played in all the local tournaments growing up – and even went on to play in both high school and college. In my later years, I read a book called “Extraordinary Tennis for the Ordinary Tennis Player” by Simon Ramo, who was a scientist and statistician.  His book analyzed how tennis matches were won or lost. The book would have served me well when I was competing years ago because it brought attention to the concept of risk and return. The author highlights the fact that in expert and professional tennis about 80% of the points are “points won” simply because of superior talents by the participants. This means that in professional matches, the points won are typically accomplished by brilliant passing shots and by very few misses. In our mere mortal amateur world, however, the opposite is the case. About 80% of the points won in an amateur match are accomplished by “points lost” – i.e. points that are caused by errors, missed shots or double faults by the opponent. In other words, just being consistent and conservative can help the lesser player win a match against a formidable foe with a reckless game plan.

Using patience and conservatism in tennis is very similar to investing in the stock market. Author Charles Ellis wrote an excellent article called “The Loser’s Game” in 1975, which was published in The Financial Analysts Journal. Ellis referred to the “Extraordinary Tennis” book and then tied it to how investment professionals should manage client portfolios. He writes, “Many of these investors spent their whole lives as overachievers – often class Presidents and Ivy League graduates with amazing talents.” He goes on to say that, in some cases, the same group of individuals are laden with overconfidence and erroneously try to play the Winner’s Game rather than the Loser’s Game. They strive for the impossible! They manage money for outsized gains and expose their clients to too much risk.  “The trouble with the Winner’s Game”, he said, “is that they tend to self-destruct because the investment style that they use tends to attract too much attention and too many players – all of whom want to win.” In other words, the “Winners” all crowd into the same stories, trends and stocks thinking that they are increasing their chances of victory and success, but instead, they are increasing their risk and the chances of losing money.

I learned early on that you do not need to be glitzy to be successful in the investment world. Don’t be the reckless tennis player trying to hit winner after winner. You just need to be patient and develop a well thought out plan and process. Focus on playing defense and understand that conservatism will always trump speculation. Let the other guy lose so you can win. Your investment strategy should assume reasonable rates of return. Once you manage your money for that, everything else will fall into place. The last thing you want to do is to be too aggressive and hit for the passing shot. By avoiding mistakes and avoiding losses, you will win, and eventually find yourself in elite company without taking too many chances. 

-Bill Cox