Professionals win points while amateurs simply beat themselves. The same applies to investing.
In 1975, Charles Ellis wrote a wonderful paper titled “The Loser’s Game.” He observed how very difficult it was to be a successful investor, much less “beat the market.” One of the problems he noted – true then and even more so now — was that the market was increasingly becoming dominated by institutional investors — those who had billions of dollars to spend on research, information, access, traders and innumerable other advantages over an individual. How could anyone ever realistically hope to compete against that? Imagine what a football game might look like if you picked a few of your local buddies and stepped out onto the field against say, the New York Giants. The outcome would be an easy call.
Today it is more paramount than ever for individuals to recognize the caliber and quality of their investment competition: If you don’t know who the sucker is at the poker table, chances are it’s you. And make no mistake about it, institutional investors, with their near unlimited resources, are standing on the other side of virtually every buy and sell decision that you make.
Ellis went on to make a brilliant point in his paper for individual investing, and he used a tennis analogy to illustrate it. Ellis pointed out that tennis was not one game, but two. The first would be the type of tennis played by the professionals and very gifted amateurs. The other game is played by the rest of us.
Now in both games, the same equipment, dress, rules and scoring are used. But that’s where the similarities end. You see, while professionals win points, amateurs tend to lose points. Professional players win games with excellent strategy, execution and few errors. Amateurs often end up with net balls, out-of-bound shots and double faults. The amateur often simply beats himself. The victor in a professional match is the player who scores the highest number of points. The victor in an amateur match will also eventually rack up the higher score, but usually it is because his opponent loses even more points through errors.
The same applies in investing. Individuals often beat themselves through a myriad of bad habits and destructive behavior that imposes a real and significant cost: The proverbial bad investment shots.
While the tenets of successful long-term investing are simple to understand, the practice and implementation are tough. And anyone who thinks otherwise is foolish. And you know what they say about a fool and his money. Today, instant and unfettered access to the minute-by-minute, ginned-up news hysteria has inflicted a terrible burden on individuals. It has created a sense of urgency to do something now. What a sure-fire way to guarantee sleepless nights along with a miserable and likely unprofitable investment experience.
So what’s the smart way for individual investors to overcome the “loser’s game”? Don’t play it. Stay away from the conventional Wall Street noise and games. Instead, play a game you can win. Make fewer bad shots. Start with a thoughtful and comprehensive investment strategy to handle all of the economic seasons and cycles. Work closely with a competent adviser to ensure that you are covering all bases. A properly designed approach considers and incorporates contingencies and circumstances ahead of time. Make sure that plan takes into account your personal circumstances and your personality. Shoot for a plan that is defined and provides for a cross section of investments across all of the economically sensitive asset classes. Cover your bases. The reason behind the wisdom of having such a plan is that it becomes a discipline to adhere to when the view gets murky — when you can’t see over the horizon. As if you ever can.
And finally, once you’ve got your plan in place, let it work. Ignore the noise. Ignore the distractions — virtually everything that you’ve been led to believe is important, including market news, market forecasts, economic news, economic forecasts, bull and bear debates, stock picks, stock pans, political news and virtually anything and everything else. This “information” most often does nothing more than stir the pot, create anxiety and spur you to reflexive action. Please don’t make the mistake of confusing activity with progress. Often, they could not be more different.
Want to take a fling with your mad money and speculate on a long shot? By all means, do. But never do it with your serious long-term investment capital. Want to win the loser’s game? It’s easy. Don’t play it.