Winning a Loser’s Game

In his 1975 essay, ‘The Loser’s Game,’ investing guru Charles Ellis used the game of tennis to highlight two different approaches to success.

Tennis, he suggests, is not really one game but two. The first kind is professional tennis, which involves elite players of almost equivalent ability. Although such players, like anyone else, can experience bad luck and mistimed shots, they rarely make ‘mistakes’ of the most basic, bone-headed kind. Attending a Wimbledon game means witnessing elite athletes at the top of their game engaged in a struggle to see who is slightly better than the other.

Games like these are usually determined by razor-thin differences in performance and the more powerful player will ultimately decide the outcome.

The same might be said of professional boxing, sprinting, and chess. These activities, in which the most stunning feats of agility, speed, and intellectual strategy will ultimately prove to be decisive, are archetypal winner’s games.

On the other hand, amateur tennis players are usually their own worst enemies. Lacking the flexibility or precision that years of training bring, amateur players are somewhat more likely to hit a ball out of bounds than to lop it beautifully over the net.

Tennis of this sort is what Ellis calls a loser’s game. Participants are not only playing with one another, but struggling against the game of tennis itself, which is every bit as challenging to them. In such a contest, the weaker player will almost certainly determine the outcome through their own mistakes.

As it happens, a few tennis lessons can be gleaned from this, at least for the inexperienced:

If you are an amateur player and you find yourself competing with someone similarly unpractised, your best strategy is to remain as prudent, restrained, careful and calm as possible, and let the other guy prance vainly about the court, missing every diligent ball you send his way.

That is how you win a loser’s game.

At one point in his essay, Ellis quotes famed engineer and businessman Simon Ramo:

“Give the other fellow as many opportunities as possible to make mistakes, and he will do so.”

And what, you might ask, is the world’s most complex, volatile, and thrilling loser’s game? The game of investing.

While history shows us that it’s clearly possible to be a sensible, wise, and intelligent investor, it’s not quite possible to be a ‘talented’ one — at least talented in the way a tennis or chess player is talented. Other virtues are needed — patience, good judgement, and others — but not talent.

The global stock market is a complex system. There is so much going on across so many frontiers that nobody can truly ‘hack’ or ‘beat’ it. The most we can do is play a clever game with the uncertainty we have.

Michael Moritz, founder of the legendary venture capital firm Sequoia, was once asked how his company had managed to be a success for four decades running. His response?

“I think we’ve always been afraid of going out of business.”

By framing his achievement in purely negative terms — pointing out that he has ‘won’ at the game of business simply by not losing — Moritz was explicitly speaking the language of the loser’s game.

As with those poor, talentless tennis players who just can’t help dropping their racquets or tripping over their shoelaces, some investors launch themselves into the loser’s game of the stock market with little preparation for what is ahead of them. Intelligent as they might be, they haven’t yet figured out how to cultivate the relevant habits like patience and temperament. And if you treat a loser’s game (one which punishes exuberance) like a winner’s game (one which rewards it), then you will most likely fail.

Here is a pretty good rule-of-thumb for many aspects of life: Know the kind of game you’re playing before you start playing it.

In support of this, one need not look any further than the collected sayings of the greatest living investor, Mr Warren Buffett.

Buffet, a Federer of the loser’s game, has spent a lifetime warning against the perils of short-term thinking and instead endorsing the buy-and-hold philosophy that made him one of the world’s richest people.

“Risk comes from not knowing what you’re doing.”

“Rule 1 is never lose money; Rule 2 is never forget Rule 1.”

“It’s not necessary to do extraordinary things to get extraordinary results.”

The point is that even a loser’s game can be won, so long as it’s played correctly. This is why more or less every good investor embraces self-education, diversification, and long-term thinking. Developing and sustaining such habits is almost certain to produce extraordinary results.

And, in fact, deciding to own your financial future is a pretty extraordinary thing, even if the Oracle of Omaha doesn’t say so.

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