Written by Andrew Fort
I write this article after having watched a thrilling second-round Wimbledon tennis match: Rafael Nadal versus Nick Kyrgios. It reminded me of an investment book by Charles D. Ellis called Winning the Loser’s Game: Timeless Strategies for Successful Investing, itself based partly on a book entitled Extraordinary Tennis for the Ordinary Tennis Player.
The premise is that tennis is not one game but two. One game of tennis is played by professionals and a very few gifted amateurs; the other is played by all the rest of us.
Although players in both games use the same equipment, dress, rules and scoring and conform to the same etiquette and customs (maybe not Nick Kyrgios!), the two games are quite different. Professionals win points, amateurs lose points. Professional tennis players stroke the ball, often through long and exciting rallies, until one player is able to drive the ball just beyond the reach of his or her opponent. Errors are seldom made by these players.
Brilliant shots and enduring rallies, are few and far between in amateur tennis. The ball is often hit into the net or out-of-court and double faults at service are not uncommon. The victor gets a better score because his or her opponent is losing even more points than they are! By the same measure, golf is another ‘loser’s’ game.
So how does this apply to investing?
Most professional investment managers believe that they can beat the market, in other words that they can consistently perform better than average. The financial pages in newspapers are full of adverts proclaiming that this fund or the other has performed better and that you should invest with them. However, after allowing for costs, a manager who wishes to deliver returns 20% better than the market must earn a gross return before fees and transaction costs, that is more than 40% better than the market. Most people would accept that this is highly unlikely. The book was written in 1975; it is commonly accepted that the market is much more efficient now than it was then.
In the space that this article allows, the solution is quite simply to make fewer investment mistakes than others. Try to do a few things unusually well. Have a real financial plan for your future, make sure you have enough money for the short (and don’t take risks with short-term money) medium and long term. Diversify as much as possible. Don’t believe in predictions. Don’t believe the adverts. Finally, as I said in last month’s article, you should never hold enough of any one holding to make a killing or to be killed.
Arguably one of the reasons that Rafael Nadal won the match is because he didn’t showboat by playing shots with a low probability of success.