BookWorm: Winning The Loser’s Game

The investment management business is based on a single basic belief: Investors can beat the market. Unfortunately, when these investors are themselves the market they cannot, as a group, outperform themselves. They’re playing a loser’s game.

Good sense of humour and investment acumen don’t normally go hand in hand. Apart from Warren Buffett there are very few value investors who possess all the three qualities of candour, straight talk, and good humour. Charlie Ellis is one of them.

Ellis is a strong proponent of index funds. According to him, for an individual investor the best strategy to compound wealth over the long term is to shun the active money management and go with index funds. I don’t personally agree that index fund, especially for those who are willing to invest few hours every week in learning the game, is the right choice for all investors. Nevertheless, I find Ellis’ arguments very compelling.

Charles Ellis wrote a paper in 1975 which popularized the concept of loser’s game. The paper talked about how the approach taken by good and bad tennis players is also seen in investing. Ellis’ article was based on Dr. Simon Ramo’s research. The idea was later adopted into this book called Winning The Loser’s Game.

Loser’s Game

Dr. Ramo, in his book Extraordinary Tennis for the Ordinary Tennis Player, argues that in expert tennis the ultimate outcome is determined by the actions of the winner. Professional tennis players stroke the ball hard with laser-like precision through long and often exciting rallies until one player is able to drive the ball just out of reach or force the other player to make an error. These splendid players seldom make mistakes.

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