Don't Be a Loser
In 1975 Charles Ellis wrote a landmark article in the Financial Analyst’s Journal called “The Loser’s Game”. In the article, he compared investing to tennis.
In tennis there are two general groups of players. Highly skilled amateurs (think NCAA level players) and professionals comprise the much smaller group. Unskilled or modestly skilled amateurs comprise the majority of players. For the highly skilled, tennis is a game of winning shots with a narrow margin for error. You move your opponent around the court in order to place a volley just beyond their reach. It is a game of precision. For the unskilled or modestly skilled (i.e. most of us) the winning strategy is the opposite. Tennis at this level is a game of letting the other player beat him or herself with their own losing shot. Just get the ball over the net, keep it in play and your opponent is likely to hit it into the net or out of bounds. Thus for most of us, tennis is a loser’s game.
How does this apply to investing? Ellis said that the financial markets were becoming so efficient, so competitive, that the people who managed money were so skilled, that it was difficult to find stocks that were not trading at prices reasonably close to their fair value at any given moment of the trading day. It was becoming increasingly difficult for the most highly skilled managers to “beat the market”. There were few if any “winning shots” to hit. How does one “win” in such an environment? By accepting the market return since it is highly unlikely that you (or your financial advisor) will beat it. Investing had become a “loser’s game” in the sense that to win, you just had to avoid the mistakes of stock picking, market timing, or other other losing strategies. Let the other investor hit it into the net.
He wrote that article nearly 40 years ago. Have things changed in his mind? Not at all! In a recent interview with Jason Zweig of the Wall Street Journal, Mr. Ellis stated that “Stock picking has seen its day” and “With rare exceptions, active management is no longer able to earn its keep.” Decades of academic research and research from powerhouse mutual fund companies such as Vanguard and Dimensional back up Mr. Ellis.
So what should the ammeter of DIY investor do? We’ll explore that question next week.