Winning the Loser's Game

In his book Extraordinary Tennis for the Ordinary Player,?Simon Ramo?describes how about 80 percent of points are lost, not won in amateur tennis.

As defined by Ramo, lost points result from a player making an unforced error, such as hitting an easy return out-of-bounds, rather than hitting a brilliant shot that is impossible for an opponent to return.

The lesson is that majority of amateur tennis players will have much more success by working on “not losing,” rather than by “trying to win.”

The world of investing is much like in tennis.

Two distinct games are being played — the Winner's Game and the Loser's Game.

The Winner's Game in investing is much like professional tennis, where seasoned investors engage in aggressive, skill-based strategies to outperform the market.

On the other hand, there is the Loser's Game.

Played by amateurs and much like amateur tennis, it is characterized by investors with lesser skill. To try to play the Winner’s Game without the skill in investing will achieve the same results as it would in tennis — losses and injuries.

Instead, winning at the Loser’s Game requires a more cautious approach, focusing on minimizing errors and avoiding losses rather than achieving spectacular gains.

In the Loser’s Game, for most individual investors, success is more likely achieved not by trying to beat the market but by avoiding common investment mistakes. This involves understanding market volatility, recognizing the limitations of one's investment prowess, and implementing strategies that prioritize long-term stability over short-term gains. In essence, winning the Loser's Game in investing is about risk management, disciplined asset allocation, and maintaining a long-term perspective.

The core principle of winning the Loser's Game in investing is risk management.

Unlike professional investors who may have the resources and expertise to pursue high-risk, high-reward strategies, the average investor is better served by a conservative approach.

This involves diversification, investing in a mix of assets to spread risk, and avoiding the temptation to time the market. Studies have consistently shown that the average investor underperforms the market, largely due to poor timing and reactionary decision-making.

By focusing on risk management, investors can protect themselves from significant losses, which are often harder to recover from than it is to forego potential high gains. This approach mirrors the amateur tennis player's strategy of keeping the ball in play and waiting for the opponent to make a mistake, rather than attempting risky, high-powered shots.

Another key aspect of winning the Loser's Game in investing involves acknowledging and mitigating cognitive biases.

Behavioral economics teaches us that investors are often swayed by emotions like fear and greed, leading to irrational decisions such as panic selling in a downturn or chasing high-performing stocks.

The Loser's Game strategy advocates for a disciplined, long-term investment plan that resists the influence of market euphoria or pessimism. This can be achieved through techniques like dollar-cost averaging, where investments are made in regular intervals, regardless of market fluctuations, thereby reducing the impact of timing and emotional decision-making. This disciplined approach parallels the patience and consistency required in amateur tennis, where the focus is on steady play and avoiding unforced errors, rather than making spectacular but risky plays.

Lastly, winning the Loser's Game in investing involves a systematic approach to asset allocation and rebalancing.

This means setting a diversified portfolio that aligns with one's investment goals and risk tolerance, and then periodically adjusting it to maintain the desired asset mix. This systematic approach reduces the reliance on speculative, market-timing decisions and ensures a balanced portfolio that can withstand market fluctuations.

For instance, in a rising market, rebalancing might involve selling some of the outperforming assets to buy more of the underperforming ones, thereby maintaining a stable asset allocation. This methodical approach focuses on long-term success rather than short-term wins.

One might argue that a more aggressive, Winner's Game approach can yield higher returns, especially in a bullish market. While this is true, such strategies come with higher risks and require a level of expertise and market insight that most individual investors do not possess.

Moreover, if taking more risk guaranteed higher returns it would not be high risk in the first place.

The philosophy behind winning the Loser's Game in investing is designed to maximize the probability of achieving steady, long-term returns, suitable for the majority of investors who lack the resources or expertise to engage in high-risk, active market strategies. It aligns well with the needs and capabilities of most individual investors by emphasizing the importance of risk management, emotional discipline, and systematic asset allocation, focusing on long-term stability and consistency over short-term gains.

This approach is not about seeking spectacular wins but about avoiding significant losses, a strategy that is often more attainable and sustainable for the average investor.

Much like the approach of an amateur tennis player, it requires patience, and discipline to avoid mistakes. It acknowledges the markets' unpredictable nature and individual investors' limitations, guiding them towards a path of steady and secure asset growth.

Winning the Loser's Game in investing is an approach that generates returns by avoiding common investment mistakes. As Charlie Munger said,

It is much easier to avoid stupidity than it is to be brilliant.