If you ever play against me in ping pong, you won’t be impressed. I’m steady and not aggressive. You can expect me to consistently put the ball on your side of the table. I’ll limit my mistakes and give you many chances to make unforced errors. That’s my game.
Howard Marks, co-founder of Oaktree Capital, has the same strategy in tennis. He describes how professional tennis players become champions by hitting winners – aggressive shots where the opponent cannot reach them. Marks says that amateurs are often victorious not by hitting winners, but by making fewer mistakes than their opponents. Marks describes amateur tennis as a “loser’s game” in which the winner avoids hitting losing shots.
The loser’s game applies to life and investing. I think about the risks of going for the big winner when the outcome can be an absolute zero. For me, the goal is to stay in the game over a long period of time, so I better not bet it all and get wiped out.
Howard Marks has also taken this concept and applied it to life and investing. His writings and speeches on this subject have been very instructive for me because he emphasizes the importance of managing risks in building a successful investing career. He says that an investor must be able to survive the bad times to see decisions proven right. If an investor is positioned such that he cannot weather hard times, then peril may take him out before success can come. Successful investing is not about taking big, risky swings. Investing is about avoiding the losers and letting the winning take care of itself.
Marks often uses this saying: “Never forget about the 6-foot-tall man who drowned crossing the stream that was 5 feet deep on average.” In other words, having the potential to get in too deep and drowning isn’t worth the risk. You might keep your head above water 99% of the way across the stream and then step into a 7 foot deep hole that kills you.
I often hear others talk about investing as if it is a winner’s game. They focus on the upside and apply leverage to make it pencil out. In a rising market, they look smart and often make money. If you listen carefully, you’ll hear these people focus on the potential and skim over the risks. Their margins of safety will be thin. Stress-testing will be too short and limited in depth. This approach may work out for a while, but eventually it won’t.
Investing is a loser’s game. Avoid the losers so you can be there when the winners come.
