The Loser’s Game: Why Investing is closer aligned to Tennis than you think

In his iconic essay The Loser’s Game, Charles Ellis made a bold claim about investing: most professional investors underperform the market—and they don’t even realize why.

Charles D. Ellis wrote a timeless essay titled the The Loser’s Game in 1975 drawing parallels between tennis and investing. As Simon Ramo identified in his book Extraordinary Tennis for the Ordinary Tennis Player, tennis is actually two games rather than one. Professionals win points, amateurs lose points. In professional tennis the players win by achieving more so-called winners through skill (a “Winner’s Game”), while amateur games are mainly decided by the points lost (unforced errors, missed shots etc.) rather than the points won – a “Loser’s Game”.

Ellis calls expert tennis a Winner's Game because the ultimate outcome is determined by the actions of the winner. Victory is due to winning more points than the opponent wins– not simply to getting a higher score than the opponent but getting that higher score by winning points. Amateur tennis, Ramo found, is almost entirely different. Brilliant shots, long and exciting rallies and seemingly miraculous recoveries are few and far between. On the other hand, the ball is often hit into the net or out of bounds, and double faults at service are not uncommon.

Dr. Ramo explains that if you choose to win at tennis– as opposed to having a good time the strategy for winning is to avoid mistakes. The way to avoid mistakes is to be conservative and keep the ball in play, letting the other fellow have plenty of room in which to blunder his way to defeat, because he, being an amateur (and probably not having read Ramo's book) will play a losing game and not know it.

As Ramo noted, amateur tennis players can win more games by avoiding more errors and losing less. The same can be said of investments, where the avoidance of unforced errors or mistakes can already lead a long way to satisfactory long-term results.

In the past, professional investors had a real edge. Fewer players, less information, more inefficiencies. But now? The playing field is flooded with highly skilled managers all using the same tools, drawing from the same data, and reacting to the same market signals. Instead of competing with amateurs, they’re all competing against each other.

This is the core of Ellis’s investment strategy philosophy: the more professionals compete, the harder it becomes to consistently outperform.

Thinking through this concept reminds me of Charlie Munger’s mantra to always invert. Rather than trying the hardest to beat the market maybe it’s worth focusing on the mistakes to avoid and let the market take care of the rest.

Some investment mistakes to avoid come to mind:

• Lack of strategy
• Lack of planning (liquidity management etc.)
• Frequent transacting
• Over confidence
• Emotional rather than rational decisions
• Market timing
• Over concentration
• Excessive leverage

Remember: In a Loser’s Game, the real winners are the ones who lose the least.

Link: The Loser's Game