Winning the Loser’s Game

According to Charlie Ellis, modern equities markets are a “loser’s game.” What the hell does that mean? And how can we use such an idea to our advantage in the modern market? Allow me to explain.

In the mid 1970s, Dr. Simon Ramo articulated a key difference between a winner’s and a loser’s game by studying tennis players over the course of several years. Ellis sums up the outcome of his research nicely by saying, “Professionals win points; amateurs lose points.”

When I go out to play tennis with my friends, the winner of the game is decided by who loses fewer points. Neither of us are good enough to actually win points by performing well so we just hit the ball back and forth until one of us messes up. In contrast, professionals don’t make silly mistakes, and therefore must win the game by out-performing their opponents in sustained demonstrations of skill and strength. Despite being the same sport, it’s almost as if two entirely different games of tennis are being played. Amateur tennis is a loser’s game and professional tennis is a winner’s game. 

Let’s take this back to the investing world. Ellis asserts that doing well in the markets is a loser’s game. That doesn’t mean you shouldn’t try to create a diverse portfolio of high-quality stocks, but ultimately doing well in the stock market comes down to avoiding a few key costly mistakes.

One of the biggest mistakes that amateur traders make is trying to time the market with their stock selections in order to return short-term profits. Everyone wants to get rich overnight, but the chance that you’re going to be able to succeed with this kind of strategy is extremely low. In the words of Warren Buffett, “if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

Average investors should also realize that betting on individual stocks is more likely to damage your return than help it. Here at Dynalect, we instead choose to identify broad industries that we feel are poised to benefit from long-term growth and then invest in a selection of stocks within those industries. The final result is a well-balanced portfolio of diverse stock picks that we believe will create significant value over the next five to ten years.

Finally, a key point of winning the loser’s game is to be very careful about who manages your money, and what kinds of fees they charge to do so. When you’re shopping around for a broker, or looking at a potential investment opportunity such as an ETF or mutual fund, be wary of all the little fees that can add up to significantly damage your return potential. The Financial Industry Regulatory Authority (FINRA) has created a very useful Fund Analyzer tool that allows you to look up the securities you’re interested in to figure out what kind of fees you will have to pay to invest your money with them. We here at Dynalect recommend you consult FINRA’s service any time you want to invest in a fund to make sure you’re not being slighted by fees!

Investing wisely is a key part of creating a healthy financial future. Try not to get wrapped up in the daily thrills of the investing world. Instead, stay focused on playing the loser’s game and rest easy knowing that you’ll likely be a lot better off as a result.

Have any other advice for how to win the loser’s game? Drop us a line and let us know! Otherwise, I’ll see you next week!

Kristian Gaylord

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