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Latticework of Mental Models: Loser’s Game

In the hope of executing an impressive smash, I again sent the ball flying away from the table. Losing yet another game of table tennis to Navin, a good friend and a colleague in my previous job. It was probably 50th consecutive loss since I started playing TT with Navin.

“It isn’t that I am an extraordinary player,” explained Navin, “I just focus on returning the ball back on your side. Your unforced errors are just too many so you continue to lose.”

The idea of unforced error didn’t make much sense to me at that time. And the streak of losses continued for another few months until our employer decided to remove the TT facility from the office. They reasoned that some employees were spending more time on TT table than their workstation. I wonder who those employees were. 😉

It took another few years for the idea of ‘unforced errors’ to sink in properly. It happened when I learned about a concept called – Loser’s Game.

Charlie Ellis popularized this concept through a paper he wrote in 1975 which was later adopted into a book called Winning The Loser’s Game. The paper talked about how the approach taken by good and bad tennis players is also seen in investing. Ellis article was based on Dr. Ramo’s research.

The Two Games

Dr. Simon Ramo, in his book Extraordinary Tennis for the Ordinary Tennis Player, argues that in expert tennis the ultimate outcome is determined by the actions of the winner. Professional tennis players stroke the ball hard with laser like precision through long and often exciting rallies until one player is able to drive the ball just out of reach or force the other player to make an error. These splendid players seldom make mistakes. This game, played by professionals and experts, is called a winner’s game.

MM-1But when it comes to amateur players they play a totally different kind of game. The ball is all too often hit into the net or out of bounds, and double faults at service are not uncommon. Amateurs seldom beat their opponents but instead beat themselves. The victor in this game of tennis gets a higher score because the opponent is losing even more points. Ramo calls this kind of game as loser’s game.

Put simply, in a winner’s game, the outcome is determined by the correct actions of the winner whereas in a loser’s game, the outcome is determined by mistakes made by the loser.

Both Navin and I being amateurs in TT were always playing the loser’s game. Navin intuitively understood the idea. That’s what he was trying to tell me – instead of adding power to a serve or hitting closer to the line to win, I should concentrate on consistently getting the ball back. In other words – minimize the unforced errors.

When an expert is playing against an amateur, both are playing by the same rules in the same court and possibly using similar equipments. But even then, fundamentally, they are playing different games. It’s a winner’s game for the professional player because when he hits a smash, which he has practiced thousands of times, the odds of getting it right are close to 100 percent. He isn’t taking a chance on execution of his shot because he knows the conditions under which that particular shot is played best.

But when an amateur, having seen professionals play those mesmerizing shots, attempts a similar forehand, he is inviting an unforced error. His is a loser’s game because pulling off that move repeatedly is extremely hard.

Charlie Munger was hinting at the idea of curtailing the avoidable mistakes, the unforced errors, when he said –  “All I want to know is where I’m going to die so I’ll never go there.” In his letter to Wesco shareholders Charlie once wrote –

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.

In Investing

Few decades back the stock market wasn’t dominated by the institutional investors. A retail investor who transacted in the stock market was most likely pitted against another small investor. And among the two, the one who did superior analysis and had access to better information about the business usually made the better decision and more money.

But in the current markets when a small investor like us buys or sells a stock, the odds are high that the party on the other side is an institutional investor. The kind of resources, information and analysis that these institutional investors have makes it unlikely that a small investor can beat them in their game.

What’s their game? Institutional investors are in a race to bigger and bigger AUM which is dependent on their quarter to quarter performance. They are into the short term performance game. And if that’s where you, as a small investor, tries to outperform them, you’re playing a loser’s game. No wonder why the small investor beats himself all the time!

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

I would argue that investing in IPOs is a loser’s game too. The promoters and investment bankers who set the IPO price are better informed about the value of the business than a small investor. To draw an analogy from Tennis, you an amateur player is playing against Roger Federer or Serena Williams. It’s their game and they have massive edge. They have designed a winner’s game and enticing you to join in.

Looking for 20, 50, 100 bagger stocks in a few short years is also a form of loser’s game. Day trading is another example. It’s even worse than loser’s game. Charles Ellis has another name for day trading – The Sucker’s Game.

John Bogle, who is considered the father of Mutual Fund industry, reasoned –

Short-term market timing is a loser’s game. None of us know what tomorrow holds, not Bogle nor anybody else. And that’s why I have never done anything other than a 10-year reasonable-expectations perspective.

Any day, any week, any month, any year can do what it wishes, but 10 years it comes down to how corporations do, and that’s more important than how the stock market does.

How do you win against Tiger Woods? The answer is simple – just don’t play him in Golf!

So how do you win a loser’s game? Just by extending your focus from short term to long term, you transform your playground and take it into the winner’s game arena.

Ellis in his book concludes –

Winning the loser’s game of beating the market is easy: Don’t play it. Concentrate on the winner’s game of defining and adhering faithfully to sound investment policies that are right for the market realities and right for your long-term goals and objectives.

Concentrate on playing the winner’s game. For a small investor, playing the winner’s game in stock market means ignoring the mood swings of Mr. Market, concentrating where the earnings and cash flows of the underlying businesses you own, or want to own, are going to go over long term and most crucially, knowing your limitations as an investor.

This doesn’t sound very complicated right? But don’t forget Warren Buffett’s words –

Investing is simple—but it’s not easy.

Ironically, when these institutional investors are transacting with each other, their winner’s game turns into a loser’s game for themselves. Since they don’t have any special edge against each other and are driven by same rules, conventions and incentives.

The basic assumption that most institutional investors can outperform the market is false. When institutions are the market they cannot, as a group, outperform themselves. In fact, given the cost of active management—fees, commissions, market impact of big transactions, etc.— a large majority of investment managers have and will continue over the long term to underperform the overall market. And the statistics prove that.

So investing is a loser’s game, not only at the amateur level, but also at the professional level.


“We all like winning with investments,” writes Ellis, “and we all can win—at lower cost, less risk, and less time and effort by knowing our real objectives, developing a sensible strategy, and sticking with it for the long term so that the markets are working for us. For most investors, the hardest part is not figuring out the optimal investment policy; it is staying committed to sound investment policy through bull and bear markets.”

In investing, you are your own worst enemy…not bankers, not brokers, not business channel experts. You.

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.

When Michelangelo, the famous 16th century sculpture, was asked about the secret of his genius and how he created his masterpiece, the statue of David, his answer was, “It’s simple. I removed everything from the stone that is not David.”

One of the ways to think more clearly and rationally is to adopt Michelangelo’s method. Don’t focus on David, instead concentrate on everything that’s not David and chisel it away. In other words, eliminate all the cognitive errors and better thinking will follow.

Warren Buffett says –

Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them.

So to be successful all you need to know is what blocks the success. Eliminate the downside, the thinking errors, and the upside will take care of itself.  The biggest lesson from Ellis’ Loser Game mental model is this – It’s better to avoid stupidity rather than seeking brilliance.

If you understand only this single concept, that investing is a loser’s game, you will do well as an investor throughout your life.

Take care and keep learning.

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About the Author

Anshul Khare worked for 12+ years as a Software Architect. He is an avid learner and enjoys reading about human behaviour and multidisciplinary thinking. You can connect with Anshul on Twitter.


  1. Good one Anshul. Thanks.

  2. Niradhip says:

    Love it Anshul…

  3. Rakesh says:

    Great article, especially comparison drawn between FII/DII and retail investor

  4. Good post Anshul. Tennis analogy, is spot on.Please increase post frequency 🙂

  5. Niyas cv says:

    Anshul, your writing is class. People who don’t like reading lengthy books can grasp the complete idea by simply reading ur articles.

  6. Deepak Krishnan says:

    Thanks Anshul 🙂

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