First Page

Winning by not losing

A famous investment manager's sports analogy shows investors why they must play to their own strengths

Winning by not losing

Winners and Losers

A lot of us, in a lot of different fields, feel that emulating the winners is a good way to win. If something works for those who get the best results, then why shouldn't it work for others? From parents trying to get their kids to emulate the toppers in their class to salespeople trying to copy the pitch of their top-performing peers, everyone tries to emulate winners. This idea of emulating winners is particularly entrenched in investing. Investors are forever trying to find out what other, more successful investors are doing and then copying that. It seems like the right thing to do, but does it work? And if it works once in a while, does it work often enough for investors to copy others blindly? 

There's an interesting counterpoint from a well-known investor. Search for a video of the well-known investor and fund manager Howard Marks give a talk to Google employees, in one of the well-known 'Talks at Google' series. Howard Marks has been a successful fund manager who is also known as a good writer about investing. His writing is mostly in the form of incisive memos on investing that he sends out. Even Warren Buffett has said that when a memo from Marks arrives, he drops everything to read it.

In his talk, Marks explained his point by giving an analogy from tennis. He said that top tennis players win by playing a lot of shots that are winners. A Djokovic or a Murray or a Williams often play shots that few of their opponents can handle, and play such shots with great regularity. However, amateur players can't play such shots, except by rare chance. Marks says that watching amateurs--even fairly new amateurs--make it clear, that for them, the key to winning is to not hit losers, instead hit winners. A good amateur player believes that if he or she can just get the ball over the net and keep that going for 10, 15 or 20 shots then sooner or later, the opponent will make a mistake. Amateurs achieve their victories by just managing to do the ordinary thing competently and consistently.

The analogy to investing is clear. Great investors hit winners. They generate returns from the unlikeliest of investments because they have the ability to hit winners that others can't. Moreover, because investing is a closed activity, you will also come across many who will hide their losers and talk only the occasional winner that they hit by chance alone. Most of us should ignore all this chatter. We should try and be the consistent amateur and concentrate on not hitting losers.

What does that mean in the context of investing? It means that one of the basic tenets of investing is that avoiding mistakes is far more important than making brilliant choices. Far too many investors, whether they are investing in an equity mutual fund, or choosing stocks to invest in, are obsessed with finding the absolute top performer. Unfortunately, unless you are a genius and lucky, this doesn't happen. What does happen is that such investors flit from idea to idea, generally chasing past performance and buying into yesterday's winners in an effort to spot the ultimate winner.

On the other hand, the avoiding losers approach is very different. For mutual fund investors, this involves finding a conservative fund with a good long-term track record and then investing regularly through an SIP for a long (as in years) period. If the period for which you are investing is a short one (you'll need the money within months or one to two years), then this means avoiding equity investing altogether, instead of looking for short-term winners. It also means never getting interested in any sectoral or specialised fund, or anything that is flavour of the day. Most importantly, it means not stopping one's SIPs in response to a market decline or a phase of volatility.

It's much easier to succeed by playing to one's strengths, than to fail by trying someone else's.

Other Categories