The Loser’s Game

It had become a weekly tradition—a break away from both of their hectic work weeks.

Jim and Roger loved their weekly tennis appointment and they met up on the local court every Thursday at 8 p.m. Both were equally good tennis players and this annoyed them to the point where their matches often grew into vivid fights.

And although Jim and Roger were both bettering each other, they were no doubt still amateur tennis players. But they acted like they weren’t. The sport had grown on them and so they met up every other weekend in front of the TV to watch a professional tennis match, pick up some techniques, and down some beers.

It was once again Thursday, and Jim and Roger had agreed to play a full match that day. Both fully determined to win, they put on their best tennis outfit, warmed up diligently, and even brought their wives to the game to count points and keep the rules in check. This was serious business.

It started out with exciting rallies. Jim sent powerful shots across the net while Roger made a great effort of returning miraculous slices. When Roger sent a hard slam, Roger would attempt a backspin. On it went until they both had a set to their score.

Even as they became increasingly fatigued, Jim continued slamming hard balls and Roger continued slicing away. And it may even have looked like a pro tennis game if it wasn’t for one thing: the ball was rarely kept in play. Jim and Roger could only return three or four balls until it was either hit out of bounds or into the net as soon as one of them attempted a brilliant but daring shot.

Roger picked up on the pattern and changed his strategy. Rather than trying to make any brilliant shots, he prudently focused on keeping the ball in play. Whenever the ball was set up for a perfect shot, he would remain careful and calm, only focusing on getting the ball inside his opponent’s court.

It worked brilliantly.

For every diligent ball Roger sent Jim’s way, Jim would prance vainly about the court trying to hit a perfect shot that would be out of reach for Roger to return. But while he succeeded sometimes, he didn’t the majority of times. Often, the ball went right into the net or out of line. Roger ended up winning the game while Jim raged on about how that could have happened.

The secret was that Roger realized he was playing The Loser’s Game and acted accordingly. In other words, instead of winning the match by skill, he let Jim defeat himself.

The Loser’s Game: An Important Mental Model

The lesson from the story is an important one that can be drawn to many aspects of life: Know the kind of game you’re playing before you start playing it. It really is such an important trait that it should always be included in your latticework of mental models.

The Winner’s and Loser’s Game idea originates from Simon Ramo who identified the crucial difference between the two in his book, Extraordinary Tennis for the Ordinary Tennis Player.

In the book, Dr. Ramo—a scientist and statistician by heart—decided to test his hypothesis of the Loser’s Game in a tennis match via a clever but simple method. Instead of counting points the conventional way, all he did was count points won vs. points lost. And what he found was a surprisingly consistent tendency: In professional tennis, about 80% of the points are won due to brilliant shot execution; in amateur tennis, about 80% of the points are lost due to unforced errors. While professional tennis players play a Winner’s Game, amateur tennis players play a Loser’s Game.

His conclusion was simple. To win at amateur tennis, you only need to avoid mistakes. And the way to avoid mistakes is to be prudent, keep the ball in play, and let the other guy defeat himself in doing so. The other guy will try to beat you but an activist strategy will not work. His effort to win more points only increases his error rate. And it works ever brilliantly when he doesn’t realize that he himself is playing a Loser’s Game.

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

— Simon Ramo

Examples of Winner’s and Loser’s Games

It’s not just tennis. Any game can be assessed through the mental model of the Winner’s and Loser’s Game. What’s important is whether you can assess which one you are dealing with and adjust your winning strategy accordingly.

Winner’s Games are ones in which the outcome of the game is entirely dependent on the player’s ability. Great examples of Winner’s Games are chess, sprinting, and weightlifting.

Loser’s Games are entirely different from Winner’s Games. Loser’s Games are ones in which the players struggle to compete against the game itself. In such games you make more progress getting ahead by avoiding mistakes rather than making brilliant decisions.

War is the ultimate Loser’s Game. Gambling in casinos is obviously a Loser’s Game. Amateur tennis is a Loser’s Game.

And then there are fields in which the game transforms mid-way. For example, in a boxing fight, the fighters spend a lot of energy in the beginning to try and knock each other out. If none of them succeeds after a couple of rounds, the game is about endurance and who can survive the most punishment. A Winner’s Game turns into a Loser’s Game.

Now, there is one kind of Loser’s Game that continues to fool millions of people. It’s likely the most thrilling of them all, and it sucks people in every day by their attempt to win the game by applying a Winner’s Game strategy. But because it’s an attempt to do the impossible, it pretty much never works.

I’m talking about the Loser’s Game of investing.

The Loser’s Game of Investing

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.

— Charlie Munger

It’s gradually becoming a well-known fact that the majority of professional money managers—the ones who have devoted their entire career and day to picking stocks—are not beating the market. Most of the time, the market is beating them.

In his 1975 paper titled “The Loser’s Game” which was published in the Financial Analysts Journal author Charles Ellis wrote about this very phenomenon. His thesis was later turned into a book.

Charles Ellis writes:

The belief that active managers can beat the market is based on two assumptions: (1) liquidity offered in the stock market is an advantage, and (2) institutional investing is a Winner’s Game.

Both assumptions are false. But even so, the investing game continues to suck in bright and articulate individuals laden with overconfidence who erroneously try to play the Winner’s Game rather than the Loser’s Game. They manage money for outsized gains, expose their clients to too much risk, and rake up too many transaction fees in the process.

Why? Because these people all compete against themselves and they all try to do it faster than the other. At the time of Ellis’ paper in 1975, the institutional share of the stock market had risen from about 30 to 70 percent over the past decades while the typical equity portfolio turnover had gone from 10 to 30 percent. Those figures have increased to about 80 percent institutional investing while turnover for the average equity fund has likely rocketed to somewhere between 90 and 100 percent. The hunt for alpha has become a race against time and they all try to do it faster.

The very essence of how a Winner’s Game turns into a Loser’s Game is when the players all flock to the same place based on the wild successes of the early players. So, the investing game wasn’t always a Loser’s Game. It was transformed from a Winner’s Game into a Loser’s Game. It’s something that has happened over time, a trend that largely began in the 1960s.

The people who came to Wall Street in the 1960s had always been—and expected always to be—winners. They had been presidents of their high school classes, varsity team captains, and honor students. They were bright, attractive, outgoing and ambitious. They were willing to work hard and take chances because our society had given them many and frequent rewards for such behavior. They had gone to Yale and the Marines and Harvard Business School. And they were quick to recognize that the big Winner’s Game was being played in Wall Street.

Couple that with how these players have evolved: Bloombergs on every desk, CFA charters, high-frequency trading, computer simulations, globalization, the internet, and so on. And since institutional investors are in a race to bigger AUM dependent on quarterly performance, no wonder why the players can’t beat themselves in their own game. Their efforts to beat the market are no longer the most important part of the solution. They are the most important part of the problem.

How to Win The Loser’s Game of Investing

Luckily, there are a few principles that allow one to play the Loser’s Game of investing successfully for those who dare to do so. And they are not about being smart, although that’s a useful trait.

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

— Warren Buffett

Charles Ellis suggests two solutions to the Loser’s Game problem. Either join the market by investing solely in index funds or follow the four following principles.

Principle #1: Make sure you are playing your own game.

In other words, know your circle of competence and know it really well. Learn the central lessons of behavioral finance that go against your investing success and that entice you to try and play the Winner’s Game—particularly since Mr. Market is one of the most entrancing seducers of all time.

Principle #2: Keep it simple.

What is the biggest problem with professional money managers? It’s that they turn over their portfolio way too often because of the short-term pressure it puts on their ability to keep a high AUM. It’s a blessing that you don’t have that problem. You don’t need to make a decision before it’s right in the center of your strike zone and then you can afford to sit on your ass.

Simplicity, concentration, and economy of time and effort have been the distinguishing features of the great players’ methods, while others lost their way to glory by wandering in a maze of details.

Principle #3: Concentrate on your defenses.

Charles Ellis argues that the competition puts almost all its research effort into making purchase decisions. Therefore, in a Loser’s Game, most time should be spent on making sell decisions.

Almost all of the really big trouble that you’re going to experience in the next year is in your portfolio right now; if you could reduce some of those really big problems, you might come out the winner in the Loser’s Game.

Eliminate the stuff that is highly levered or works against the interests of society. Let someone else pick that stuff. In other words, let the other guy lose so that you can win. Make sure that you can keep playing by hitting shots that make the next shot easy.

There are old pilots and bold pilots, but there are no old, bold pilots.

— E. Hamilton Lee

Principle #4: Don’t take it personally.

In the investing business, working harder isn’t at all correlated to getting a better outcome. And we are all, as a group, captives of the normal distribution of the bell curve. The way to give yourself the biggest chance of being on the right side of the curve is by fishing in the less-crowded pond. Your investing success will not come from being better at analyzing businesses. It will come from finding opportunities in places where others aren’t looking.

Most of the people in the investment business are “winners” who have won all their lives by being bright, articulate, disciplined and willing to work hard. They are so accustomed to succeeding by trying harder and are so used to believing that failure to succeed is the failure’s own fault that they may take it personally when they see that the average professionally managed fund cannot keep pace with the market any more than John Henry could beat the steam drill.


All in all, the way to win is by making fewer bad shots. In any Loser’s Game, the major advantage comes from avoiding stupidity rather than seeking brilliance.

Oliver Sung

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