Tennis author Simon Ramo described professional tennis as a "winner's game" — the superior skills of the top players drives the score. This is deeply contrasted with amateur tennis where winning is determined by the player who makes less mistakes. This should seem intuitive to any weekend warrior. If you play tennis with your spouse the winner will be the player with less unforced errors. In other words, it's a "loser's game".
In the 1975 paper, Loser's Game, published in the Financial Analysts Journal, investor Charley Ellis described investing as a "loser's game". In a winner's game, you need to perform spectacularly. You need to be elite. This is not the case for investing where survival is at least half the battle. You are not trying to win. You are trying to not lose.
Don't forget your racket — investing is a loser’s game
- Don't make stupid mistakes
- Munger reminds us it's not just your competence, but your assessment of your competence: “If you think your IQ is 160 but it's 150, you're a disaster. It's much better to have a 130 IQ and think it's 120.” Buffet: "If you've got 160 IQ, sell 30 points to somebody else because you won't need it in investing"
- Stupidity is usually not a chronic state, but a matter of circumstance. Shane Parrish uses the parable of Hemingway's suitcase. Hemingway's wife lost his suitcase and its manuscripts at a Paris train station when he was just a fledgling author:
"...interesting are the details that affected Hadley’s decisionmaking at the train station. She was outside of her normal environment. She was rushing. She was ill. Each of these things on their own can increase the odds of committing an act of stupidity. Combined, they meant she was significantly vulnerable to errors in judgment."
- My own examples: living above your means, carrying high-interest credit card debt, not taking advantage of tax-advantaged investments, not having term-life insurance for your dependents
- See how multi-tasking and smartphones can lead to rash investing decisions in The High Financial Price of Our Short Attention Spans (Link)
- Farnum Street's Hemingway Suitcase analogy to investing (Link)
- Do no harm
- The Hippocratic Oath begins "Do no harm". The investing equivalent comes from Warren Buffet: "Rule #1 is don't lose money. Rule No. 2: Never forget rule No. 1."
- Avoiding danger is not the same as seeking benefits. It actually has better risk-adjusted rewards. Nick Maggiulli writes:
In his book Antifragile, Nassim Taleb refers to this approach as via negativa and thoroughly demonstrates the powerful health benefits associated with adhering to it:
"For instance, telling people not to smoke seems to be the greatest medical contribution of the last sixty years. Durin Burch, in Taking the Medicine, writes:“The harmful effects of smoking are roughly equivalent to the combined good ones of every medical intervention developed since the war. Getting rid of smoking provides more benefit than being able to cure people of every type of cancer.”
As Taleb illustrates, avoiding negative behaviors has done more for individual health than the cumulative effective of many positive medical interventions.
- Require a high bar to intervene. Overtrading, paying high fees to managers who promise outsize returns, and interrupting the magic of compounding to pay taxes are all measures that should be avoided without a crystal clear case for their benefits.
This idea comes from iatrogenics which means "caused by the healer". Nassim Taleb describes it as "naive intervention". While doctors are trained to be conservative in their prescriptions, this premise seems poorly understood in other fields. Shane Parrish speculates:
I can think of a few reasons as to why otherwise well-intentioned people continue to intervene where consequences outweigh the benefits.
Some of the flaws include 1) an inability to think through problems, 2) separation from consequences, 3) a bias for action
The mechanism of medical treatments is opaque so its practitioners prefer to err towards inaction when rewards are unclear.
I'm hesitant to take new supplements for similar reasons. If the benefit is not both significant and easy to see, I will always wonder if I'm wasting my money. And because of placebo effects, I may be reluctant to abandon the intervention even if it's costly. How do you know if the expensive fish oil is worth it? I know ahead of time that if I start taking it I won't know how to evaluate it. I choose to be careful and reluctant to put myself on such shaky epistemological grounds.
Investing is even less deterministic than medicine. We fail to consider multi-order effects. We like to feel like we have control. And if we are being honest, we cannot draw lines between our actions to their outcome.
- Nick Maggiulli's Avoid The Zeros (Link)
- Farnum Street recapping Iatrogenics (Link)
- Charley Ellis' 1975 paper The Loser's Game (Link)
- My summary of Charley Ellis on Invest Like The Best podcast (Link)