Book Synopsis: Winning the Loser’s Game

Peter Drucker, the management guru, said, “This is by far the best book on investment policy and management.”

The more I read books on investing, the more I get convinced that investing is much simpler than most people think or are told. Simple, but not easy as Buffett had once said.

Most of what one really needs to know is included in ‘The Intelligent Investor‘ by Ben Graham. I think everything else is either some adaptation, repetition or not very useful.

BOOK_Winning-the-Losers-Game‘Winning the Loser’s Game’ by Charles D Ellis is another such book which is a good read on investment policy, and contains some timeless techniques repeated over and over again. The problem is not in understanding the lessons, it is in the implementing.

The underlying theme of the book is that due to the predominance of professional institutions in the markets in recent years, the very fact that each of them competes on the basis of trying to beat the market makes it impossible for any of them to consistently win – hence making it the loser’s game.

For individual investors who are sidelined in this mad rush, reconciling to this fact and not trying to compete, but rather plodding along and trying to minimize mistakes, and refusing to play the game is the only real way they can win. And they can do that by adopting an investment policy with index funds, which provide them with an unfair advantage, at the core of it.

But if that is the simple message of this book, why waste 200+ pages on it?

Right at the outset, in the foreword, it is candidly stated that most of the message of such books can be completed in 2-3 pages of prose, (or as Scott Adams said in 1 page).

“Each of these books outlines an easy-to-understand solution that could be distilled to two or three pages of prose. Why, then, do the books run hundreds of pages? While it takes a short time describe the conclusion, the bulk of the message provides the motivation for establishing a sensible program and the conviction for maintaining it through thick and thin.”

That is the reason, if someone can provide the motivation and the conviction, it is still worth it. So at the cost of repetition, here are some of the key wonderful lines from this book ‘Winning the Loser’s Game’, which hopefully will serve that purpose.

“The principal reason you should articulate your long-term investment policies explicitly and in writing is to protect your portfolio from yourself – helping you adhere to long-term policy when Mr. Market makes current markets most distressing and your long-term investment policy suddenly seems most seriously in doubt.”

“Don’t trust yourself to be completely rationally when those all around you are driven by emotion. You are human too.”

“The biggest challenge is neither visible nor measurable; it is hidden in the emotional incapacities of each of us as investors. Investing, like parenting teenagers, benefits from calm, patient persistence and a long-term perspective and constancy to purpose. That’s why “know thyself” is the cardinal rule in investing.”

“The hardest work in investing is not intellectual; it’s emotional. Being rational in an emotional environment is not easy, particularly with Mr. Market always trying to trick you into making changes. The hardest work is not figuring out the optimal investment policy; it’s sustaining a long-term focus – particularly at market highs or market lows – and staying committed to your optimal investment policy.”

“Knowing history and understanding its lessons can insulate us from being surprised.…For the serious student of markets, they are not truly surprises: Most are really almost actuarial expectations, and long-term investors should not over-react. Sharp losses are to be expected and even considered normal by those who have studied and understand the long history of stock markets.”

“The story of the first hot, then ice-cold fund manager exemplifies the pathology of the mutual fund industry. On the way up, the fund management company and the press lionize the manager, attracting attention to the winning strategy. Investors respond by throwing bushels of money at the seemingly invincible stock picker. Assets under management and performance peak simultaneously. Investors suffer as performance deteriorates. The fund management company, the press, and the public turn their attention elsewhere, ignoring the embarrassment of the fallen hero. The fund management company gets paid. The fund manager gets paid. The investor pays.”

“When profit motive meets fiduciary responsibility, profits win, investors lose.”

And finally, after much repetition, Charles Ellis, in the final chapter, provides a simple summary, again. Which is simply this:

“You or no one else can ever beat the market consistently. If someone can, you can’t tell who it will be. So focus on your asset allocation, don’t lose to Mr Market’s moods, and use index funds, and you will beat most over the long-term – which is 20 years or more.” That’s about it.

Average choices for the Average Guy

My friend Swami definitely does not believe that he is ‘average’.

Some study said that 9 out of 10 people believe that they are above average. Which means that the average belief is that ‘I am above average’.

This comes to the fore during performance appraisals in companies.

Atleast 70% of the people are supposed to get an ‘average’ rating. And almost all of them turn out to be unhappy.

So leaders try to convince people that the ‘average’ rating actually means ‘solid performers’ and is not that bad. But that doesn’t help. If the average guy gets a ‘solid performer’ rating, the ‘solid performer’ rating becomes average. Which nobody is willing to accept, and which leads to 90% of the people getting disappointed. The average is not acceptable.

This often leads to pursuit of the above average. Which is not all that bad when it comes to improving your lives and your careers. But the problem is that the definition of what is average keeps changing every year.

What worked this year for you and gave you an ‘above average’ may be replicated by everyone else next year, and become the ‘new average’ – necessitating a new measure for what is ‘above average’ for this year.

Another possibility is that everyone had a great year but someone had a better great year, so relatively your great is only average. Or that everyone had a pathetic year, but relatively your pathetic was better than most other ‘pathetics’.

And then add the subjective parts on ‘how you became above average’ or ‘process above results’ kind of argument. And the politics, And luck. And whatever else.

Net net, it is a tough thing even in well defined environments to beat averages. And even tougher to predict who will do it this year or next year or for the next 5 or 10 years. But most people believe in themselves and still want to take a shot at it. Which may not be bad for progress or development, but for investing, things are different.

Even in investing, no one wants to be average, and no one – whether it is the average retail, fund manager or institutional investor – wants to believe they are average.

This is even more so in the case of individual investors. That’s the reason so many individuals pick stocks directly and so few adopt the mutual fund route. And even within mutual funds, so few adopt index funds. And there thrives a full fledged financial services industry. In pursuit of beating the average.

Maybe in corporate or other spheres of activity, one may find a way to beat the average consistently. But to do so in financial services where the average is the index is a truly herculean task. And to do so over all periods of time consistently over years is almost a statistical impossibility.

Not impossible by any means, but not easy. And even tougher is being able to say in advance who will beat the average. There are very few ‘Sachin Tendulkars’ who start with great expectations and end up meeting or even beating all of them after 20 years in this game.

Hence, honestly, for the average guy in pursuit of financial independence, it is fruitless to try being ‘above average’ or even to keep searching for the ‘above average’ performer.

The real reason for it is generally that he is no good at it and he has far better competition that keeps trying harder all the time. Even most of them don’t stand a chance of being above average over long periods of time, so let alone the average guy.

Moreover, even if he is good, it is emotionally draining and psychologically testing. And eventually, the risk of not beating the average and hence not being able to reach his goals are higher and not worth the risk.

At the end of the day, the average guy is really not interested in beating the market, but in being financially free. So why have this fruitless pursuit of trying the beat the average?

It is likely to be far better if he focuses his energies on playing a long innings and just being there, regularly investing as per his asset allocation, preferably in an index (‘Average’) fund, for 20 or 25 years, than pursue ‘above average’ performance and keep shifting – whether it is individual stocks or actively managed mutual funds – all the time.

‘This is not easy to get. And even tougher to implement’ said my broker friend Jigneshbhai.

‘But I am not the average guy! and why should I be happy with average?’ asked Swami.

‘Well, trust me’ said Jigneshbhai. ‘And there will be studies, figures and all of that to justify it, but if an average guy gets this, and implements these average choices over long periods of time, the results he is likely to get will not be average.’

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