The Rational Investor #043: Charlie Ellis on Winning the Investing Game (By Not Losing)
Happy Saturday to you,
Welcome to the 43rd edition of The Rational Investor Newsletter.
Despite mountains of evidence, countless investors continue to believe that finding success in investing requires significant effort and attention—often a combination of intellectual vigor and an abundance of time.
Today’s quote by Charlie Ellis, from his 1975 article “The Loser’s Game,” challenges this idea by explaining how the game of investing is actually won by using a tennis analogy. Spoiler: It’s not by “winning” the greatest number of points; it’s by “not losing” the greatest number of points.
In other words, it’s the avoidance of mistakes that (inevitably) leads to winning. This quote is a long one, so I’ll get to it.
Onto the main event…
Here’s Charlie Ellis on Winning the Investing Game By Not Losing [italics are of the author; emphasis is mine]:
“Simon Ramo identified the crucial difference between a Winner's Game and a Loser's Game in his excellent book on playing strategy, Extraordinary Tennis for the Ordinary Tennis Player. Over a period of many years, he observed that tennis was not one game but two. One game of tennis is played by professionals and a very few gifted amateurs; the other is played by all the rest of us.
Although players in both games use the same equipment, dress, rules and scoring, and conform to the same etiquette and customs, the basic natures of their two games are almost entirely different. After extensive scientific and statistical analysis, Dr. Ramo summed it up this way: 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. Errors are seldom made by these splendid players.
Expert tennis is what I call a Winner's Game because the ultimate outcome is determined by the actions of the winner. Victory is due to winning more points than the opponent wins – not, as we shall see in a moment, simply to getting a higher score than the opponent, but getting that higher score by winning points.
Amateur tennis, Ramo found, is almost entirely different. Brilliant shots, long and exciting rallies and seemingly miraculous recoveries are few and far between. On the other hand, 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 in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.
As a scientist and statistician, Dr. Ramo gathered data to test his hypothesis. And he did it in a very clever way. Instead of keeping conventional game scores – "Love," "Fifteen All." "ThirtyFifteen." etc. – Ramo simply counted points won versus points lost. And here is what he found. In expert tennis, about 80 percent of the points are won; in amateur tennis, about 80 percent of the points are lost. In other words, professional tennis is a Winner’s Game – the final outcome is determined by the activities of the winner – and amateur tennis is a Loser’s Game – the final outcome is determined by the activities of the loser. The two games are, in their fundamental characteristic, not at all the same. They are opposites.
From this discovery of the two kinds of tennis, Dr. Ramo builds a complete strategy by which ordinary tennis players can win games, sets and matches again and again by following the simple stratagem of losing less, and letting the opponent defeat himself.
Dr. Ramo explains that if you choose to win at tennis – as opposed to having a good time – the strategy for winning is to avoid mistakes. The way to avoid mistakes is to be conservative and keep the ball in play, letting the other fellow have plenty of room in which to blunder his way to defeat, because he, being an amateur (and probably not having read Ramo's book) will play a losing game and not know it.
He will make errors. He will make too many errors. Once in a while he may hit a serve you cannot possibly handle, but much more frequently he will double fault. Occasionally, he may volley balls past you at the net, but more often than not they will sail far out of bounds. He will slam balls into the net from the front court and from the back court. His game will be a routine catalogue of gaffes, goofs and grief.
He will try to beat you by winning, but he is not good enough to overcome the many inherent adversities of the game itself. The situation does not allow him to win with an activist strategy and he will instead lose. His efforts to win more points will, unfortunately for him, only increase his error rate. As Ramo instructs us in his book, the strategy for winning in a loser's game is to lose less. Avoid trying too hard. By keeping the ball in play, give the opponent as many opportunities as possible to make mistakes and blunder his, way to defeat. In brief, by losing less become the victor.”
It’s clear that in both investing and (apparently) amateur tennis, the best and most reliable path to success is simply the avoidance of dumb mistakes.
And just like in tennis, the dumb mistakes in investing are well known (but ignored) by almost everyone.
They are attempting to time the market, under and over-diversification, panicking out of a declining market, getting greedy during a euphoric market, speculation, and leverage.
In short, if we consolidate all those behavioral errors (not to mention many other candidates) into a single summary idea with inarguable historical support, it’s any decision other than staying the course.
Thus, with investing, we’d be wise to abide by Charlie Munger’s stated life philosophy: That is, “to figure out what’s really stupid and then avoid it.”
Thanks for reading. I’ll be back next week with more timeless wisdom from great investors.
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