The Loser’s Game

Amar Pandit , CFA , CFP

We know of Warren Buffett and his partner Charlie Munger. The investing world worships them and there are countless books that are written about them. Did you know about 40 years ago, there was a third member in their group, Rick Guerin? More about Rick later.

Be a Lambi Race ka Ghodaa (The Horse for the Long Race)” is a phrase we have all heard while growing up. Investing is indeed a long race, though I do not prefer the word race to be used with investing. This is because unlike in other races, in investing anyone and everyone can win. You do not need to be an athlete or intelligent or have any sought-after skill. Just about anyone can win. The key is then to figure out a way to become the one for the long race and win it. One of the key strategies to do that is explained in Charles Ellis’s book “Winning the Loser’s Game”.

Ellis writes about how Doctor Simon Ramo (a scientist) identified the crucial difference between a winner’s game and a loser’s game in an excellent book on game strategy, Extraordinary Tennis for the Ordinary Tennis Player. He further writes “Over many years Doctor Ramo observed that tennis is not one game but two: one played by professionals and very few gifted amateurs, the other one is played by all of us. Although players in both games use the same equipment, dress, rules and scoring and both conform to the same etiquette and customs, they play two very different games. Doctor Ramo then summed it up: Professionals win points; Amateurs lose points. In expert tennis, the ultimate outcome is determined by the actions of the winner. Amateurs seldom beat their opponents. Instead they beat themselves. The actual outcome is determined by the loser.” The person who makes fewer mistakes wins amateur tennis. Investing (Professional and Amateur) is a Loser’s Game and it is just like Amateur Tennis. The person (or institution) that makes as few mistakes as possible will win in Investing too.

You might be wondering if I had forgotten about Rick. I promise I did not, but I wanted to make a related point that you will now be able to appreciate. Rick, Warren, and Charlie used to invest together even though they ran separate funds. However, at some point of time, Rick disappeared relative to Buffet and Munger’s success. Very few people would have heard of him as compared to Buffett and Munger. So, what really happened? Morgan Housel in his book “The Psychology of Money” writes about his interview with investor Mohnish Pabrai, who recalled:

[Warren said] “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry.

What happened was that in the 1973-74 downturn, Rick was leveraged with margin loans. And the stock market had gone down almost 70% in those 2 years, so he got margin calls. He sold his Berkshire stock to Warren – Warren actually said “I bought Rick’s Berkshire stock at under $40 a piece.” Rick was forced to sell because he had levered (borrowed heavily to invest to boost returns).

The point is that Buffett and Munger have also seen steep declines of their portfolios, but they were not in a rush to make money. The stock market declines did not kill them and they could patiently wait for the investments to come up in value (knowing that they were still sound investments). They knew that investments need time and they also knew how to avoid some of the common mistakes of investing namely:

  1. Borrowing and Investing
  2. Selling when the markets are down
  3. Impatience – Some things take time and compounding certainly does
  4. Lack of Investing Discipline: Investing only when things are good and selling when things are bad

Such mistakes have the potential to inflict serious damage and thus avoiding these mistakes should be a part of your investment strategy. Not only were Buffett and Munger skilled at becoming wealthy, but they were also skilled at remaining wealthy too by avoiding these mistakes.

Most investors go wrong because they think of Investing like Professional Tennis. They think they have to identify the best stock/fund, time the market, beat the market, and beat everyone to Win. The reality is that Investing is a Loser’s game, and anyone can win by avoiding the costly mistakes and truly acting long term.

Are you playing the Loser’s Game Well?