I decided to take up tennis this year as a way of getting out and enjoying the summer while at the same time trying to stay active. My girlfriend Kathryn is a very good tennis player, so I knew that in our highly competitive household, taking some tennis lessons was going to be necessary! While I’m not sure that I’ve improved enough to seriously challenge her in a match, I have learned a lot and developed a greater appreciation for the difficulty of the sport. With that it was especially exciting for me to watch Bianca Andreescu win the US Open over the weekend and become the first Canadian to ever win a Grand Slam tournament.
One lesson that I did manage to pick up this summer about Tennis is that there are two types of tennis games. There is a “winner’s game”, and there is a “loser’s game”. Professional tennis players like Bianca Andreescu play a winner’s game. Unless their opponent makes an unhittable shot, an outright winner, a professional tennis player can usually make the shot they want almost all of the time. Errors are so rare that they actually keep track of the statistic, unforced errors. As a result, a tennis match between professional players goes to the person who hits the most winners. It is a “winner’s game”.
Amateur tennis by contrast is a “loser’s game” where the winner is usually the person who hits the least loser shots. The winner is able to just keep the ball in play until the loser makes a mistake. In amateur tennis, points aren’t won, they’re lost.
This version of tennis is very familiar to me and its exactly what our coaches taught us this summer. If you’re an amateur, don’t try to hit winners. Just keep the ball in play and you will do fine. This simple but effective lesson also applies wonderfully to investing.
Too many investors invest like they’re a pro playing a “winner’s game”, when they are actually an amateur playing a “loser’s game”. They might hit a few winners here and there, investments that they don’t mind telling stories about to their friends. But they fail to mention all of the losers they hit, and that they ultimately lost money. The vast majority of investors would be far better off to play a “loser’s game” with investing. If they just try to avoid hitting losers, and keep the ball in play, you’d be surprised at how good their performance can be. What’s more important is they will have the longevity to stay in the game, instead of getting wiped out by a string of losers.
How do you know when you’re ready to play a “winner’s game” as an investor? Well the brutally honest answer is that all investors, professional or amateur, should play a “loser’s game” with investing, almost all of the time. Investing is like tennis, except that the rules are changing all of the time. Imagine trying to hit winners in a court where the length of the court or the height of the net is constantly changing. That’s a pretty accurate description of trying to hit winners in investing. Because there are so many things in investing which are outside of our control, we really need to be concentrating on just staying in the game and keeping the ball in play.
How do we do this? Well it’s simple. We invest with a margin of safety. Just like an amateur tennis player who is trying to hit the ball to the centre of the court, rather than trying to sneak it in along the line, we are trying to hit the ball so that even if we miss by a lot, it is still going to land in the court. In investing we achieve this margin of safety by paying far less for an investment then we think it’s actually worth. That way, even if we’re substantially wrong about how good the investment is, it should still be worth more than what we paid for it. We call these opportunities, 50 cent dollars.
This sounds simple and straightforward, but in practice it is actually very difficult to do. Finding these 50 cent dollars can be very challenging and you often have to be very patient in waiting for the right opportunity to invest in. This can be especially challenging when you hear all of your friends and colleagues talking about all of the winners they are hitting. What makes it worse is that an investment that will actually land in the centre of the court often looks like a loser when you make the initial investment. It takes a lot of discipline and patience to stick to your game, even when it seems like it isn’t working as well.
Just like in Tennis, playing a loser’s game isn’t likely to be glamorous. You aren’t likely to get a great story of your best winners. However you will avoid losing a lot of money at any point in time, and you will be able to satisfy yourself with the knowledge that you’re going to beat the performance of many of your friends and colleagues who are playing a “winner’s game”.
- Craig White, BA, LL.B., CIM
Craig White is an Investment Advisor at the award winning firm Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Craig White an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.