The Losers Game – Extraordinary Investing For Ordinary Investors

Charles D. Ellis reads a book about tennis “Extraordinary tennis for ordinary players” and the book describes how tennis is two games in one, there is the professional game and the amateur game. Why do we say they are two games in one? Well the way professionals win is they outscore their opponent, they place the ball with great force and accuracy just outside their opponents reach meaning that professionals play to win the tennis games. When a professional loses a tennis game it means he was beaten by the winning player.

Contrast that to amateur tennis, they lose games. Amateurs try too hard, they hit the ball too far, they double fault when they serve, they hit the ball into the net, amateurs have lots and lots of unforced errors and so when you have two amateurs playing each other it’s not that one of them has beat the other, it’s that one of them has lost more points (put in reverse, the winning player had less errors compared to the loser) than the other and therefore loses the game.

Professionals score more points and win, whilst amateurs essentially defeat themselves and to Charlie’s great credit… he looks at this book about tennis and draws the analogy to investors.

Investors lose all the time, even professionals who in theory are supposed to be hitting harder, more accurately outside of their opponents reach as he describes it the competition is so intense. There are so many bright, well educated, knowledgeable, intense competitive players in the market place that they all sort of cancel each other since investing is a zero-sum game (there must be a loser for every winning trade and vice versa).

The advantage of indexing in Charles D. Ellis’ view is that when you have all of these smart people and they cancel each other out and you know you cannot compete with them as an amateur (you certainly wouldn’t step into a field of a Rugby game on a Saturday and play with the pros because guaranteed you will be taken out in a stretcher without fail) it’s the same thing as you step on to the grid iron of professional investing giants as an amateur, all of a sudden you’re up against smartest, strongest, fastest investment firms who have all the tools and everything they need to beat you, but they’re all competing against each other and what ends up happening is low cost, low activity index funds over the long haul tend to be the best opportunity for most individuals

This is remarkable insight that he developed, not just why indexing works but the way that amateur investors manage to hurt themselves and lose lots of money trying to compete with the pros and no matter how good the pros are, they cancel each other out is really a fascinating insight for all of us because it means we can actually win the losers game by just buying a simple, transparent, broad, and well diversified index fund that tracks the overall market at the lowest possible cost and keep adding to it consistently. By doing this for a long enough period we can outperform 80% (or even more) of all actively managed funds.

Sources: Winning the loser’s game

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Why Buying an Index Makes Sense for The Average Investor

“A minuscule 4 percent of funds produce market-beating after-tax results with a scant 0.6 percent (annual) margin of gain. The 96 percent of funds that fail to meet or beat the Vanguard 500 Index Fund lose by a wealth-destroying margin of 4.8 percent per annum.”

When asked if private investors can draw any lessons from what Harvard does, Mr. Meyer responded,

“Yes. First, get diversified. Come up with a portfolio that covers a lot of asset classes.

Second, you want to keep your fees low. That means avoiding the most hyped but expensive funds, in favor of low-cost index funds.

And finally, invest for the long term.. [Investors] should simply have index funds to keep their fees low and their taxes down. No doubt about it.”

These are the wise words of David F. Swensen, respected Chief Investment Officer of the Yale University Endowment Fund since 1985!

Adding a fourth law to Sir Isaac Newton’s three laws of motion, the inimitable Warren Buffett puts the moral of the story this way: For investors as a whole, returns decrease as motion increases.

(One) specific lesson…is the merits of indexed investing…you will almost never find a fund manager who can repeatedly beat the market. It is better to invest in an indexed fund that promises a market return but with significantly lower fees.

Source:

Word On The Street – Hedge Fund Managers Are Not Your Friend

 

“When your wealth manager shows up with the next high cost hedge fund (or private equity or infrastructure or real estate fund, for that matter), you need to ask the direct and probing questions. “Precisely, how much do you make?” is a good place to start. Or when a consultant pitches the next high-flying hedge fund, ask some basic questions, like “how did all your prior recommendations fare” or “how much alpha am I paying away in fees.” Pointed questions force a certain level of honesty – even better, ask for answers in writing to avoid any ambiguity. Too much capital in this industry flows to where it’s good for the advisors, not clients – and that needs to change.”

Andrew Beer, How Some Hedge Funds Have Ripped You Off (Barron)

Indexing as a core building block for your portfolio

Indexing refers to an investment strategy where you buy a basket of shares all at once using one product and the advantages of this are the extremely low investment costs and the simplicity of the product. Typically these products track an underlying index which tracks certain shares. E.g. The Top 40 index tracks the biggest 40 companies by market share on the Johannesburg Stock Exchange.

Indexing makes sense for the average investor who is not interested in following the markets closely but wants some skin in the game. There are many service providers out there like Sygnia who can help you track the average market returns without having to be a stock market wizard.

I was reading Jack Bogle’s Little Book on Common Sense Investing when I came across the following quote from Jonathan Davis, a columnist for London’s The Spectator:

“Nothing highlights better the continuing gap between rhetoric and substance in British financial services than the failure of providers here to emulate Jack Bogle’s index fund success in the United States.

Every professional in the City knows that index funds should be core building blocks in any long-term investor’s portfolio. Since 1976, the Vanguard index fund has produced a compound annual return of 12 percent, better than three quarters of its peer group.

Yet even 30 years on, ignorance and professional omerta still stand in the way of more investors enjoying the fruits of this unsung hero of the investment world.”

“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
– Warren Buffett, 1993 Berkshire Hathaway Shareholder Letter

Source:

Jack Bogle’s Little Book on Common Sense Investing

1993 Berkshire Hathaway Shareholder Letter