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Investing, a Loser’s Game?

In fulfilling a dream I have seen ever since I saw Pete Sampras hitting those aces, graciously walking to the other side while bowing his head, and then hitting another ace, I started learning to play lawn tennis recently.

Then, while I was reading Howard Marks’ The Most Important Thing, I came across the three major influences on his thinking, which includes two books (one of them Nassim Nicholas Taleb’s Fooled By Randomness), and a 1975 article in The Financial Analysts Journal written by Charles D. Ellis.

I searched for this article, and found a masterpiece, not just for the insights but also because it instantly related to the kind of (terrible) tennis I am playing these days.

Titled “The Loser’s Game“, this article mostly concerns the game of tennis. It talks about how the approach taken by good and bad tennis players is also seen in investing.

In this article, Ellis cites a study done in a book called Extraordinary Tennis for the Ordinary Tennis Player written by Simon Ramo.

The study shows, and as Ellis had written in his article, that…

Professionals win points, amateurs lose points. Professional tennis players stroke the ball with strong, well-aimed shots, through long and often exciting rallies, until one player is able to drive the ball just beyond the reach of his opponent.

Amateur tennis is almost entirely different… the ball is fairly often hit into the net or out of bounds, and double faults at service are not uncommon. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor… gets a higher score because his opponent is losing even more points.

The part on amateur tennis sounds so similar to how small investors invest.

Most wealth destruction happens owing to those unforced errors – hitting into the net or out of bounds, and repeating double faults at service (while making buying decisions).

So, not anyone else but the small investor beats himself all the time!

Hey, you loser!
I imagine my tennis partner saying this every time I hit an easy ball into the net or out of the line.

But then, he needs to understand that I, being an amateur in amateur tennis, will mostly hit unforced errors till I learn to play better.

You don’t have such an excuse when it comes to investing your money.

You will purely lose the plot due to your own unforced errors – mistakes in stock picking – than due to your bad luck.

That’s exactly what Charlie Munger meant while saying, “All I want to know is where I’m going to die so I’ll never go there.”

That’s exactly what Ben Graham meant through his concept of “margin of safety”.

And that’s exactly what Seth Klarman meant when he wrote this in “Margin of Safety“…

Warren Buffett likes to say that the first rule of investing is “Don’t lose money,” and the second rule is, “Never forget the first rule.”

I too believe that avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t lose money” means that over several years an investment portfolio should not be exposed to appreciable loss of principal.

While no one wishes to incur losses, you couldn’t prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of a free lunch can be compelling, especially when others have already seemingly partaken.

It can be hard to concentrate on potential losses while others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome.

You can win
Investing can become a winner’s game for you only if you work towards reducing those unforced errors – errors in picking up stocks, and misbehaving.

Of course that will come only after you start playing the game, learn to play the right shots, and keep playing them for some time.

Remember that your opponent Mr. Market can get you to be overly optimistic by showering you with good news and promises, and then scare you with bad news and threats – all leading you to making those unforced errors!

But you can learn to win, as Ellis write in his follow-up article in 2003, this time called “The Winner’s Game”.

One way to do that is to learn to hit the first shot (making the first investment decision) so nicely that it makes the next shot easy.

The other is to avoid those unforced errors.

What do you say? Is your investment philosophy and checklist geared to reduce those unforced errors?

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.


  1. Return OF capital is more important than Retrun ON capital. 🙂

  2. Rajaram S says:

    Dear Vishal,

    Thanks for sharing the 1975 article by Charles Ellis. This is one of the best articles I’ve read and reminded me of the following says by wise men –

    “Activity is the enemy of investment returns.” – Warren Buffett

    “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” – Charlie Munger

    “The true investment objective of growth is not just to make gains but to avoid loss” – Philip Fisher

    “To me, it’s obvious that the winner has to bet very selectively. It’s been obvious to me since very early in life. I don’t know why it’s not obvious to very many other people.” – Charlie Munger


    • Shirish says:

      Can someone comment on these periodic midcap carnages that seem to be taking place ? stocks down between 20-30% sometimes ? what is the reason for this ? i think all the speculators have now come to realise that shorting is the only way to make money in this market. so many of the promoters have pledged shares that it makes the game very easy for the short sellers. also there is some big cartel of short sellers in the market. they short a stock in progressively bigger quantity. finally the pledged shares come into the equation and the person/institution which has lent the promoter money , has no option but to offload. this helps the short sellers and the stock ends up in a vicious downward cycle.
      the curious thing is going to be , what happens to these companies, some of which have good infra/plants etc, but whose promoter holdings have gone down to as low as 10%, sometimes even lower ? will they one day stop operations because no one seems to own them ? or will the promoters try to suck funds out of these companies so that they remain as empty hulls of once proud enterprises ?

      this practice of stock lending at least by promoters has to be stopped.

      what is the blogs opinion ? Vishal ?

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