Sunday, January 10, 2010

Winning the Loser's Game (5th Edition) by Charles D. Ellis

In the first chapter of Winning the Loser's Game, Ellis states that in a winner's game, the outcome is determined by the correct actions of the winner. In a loser's game the outcome is determined by mistakes made by the loser.

He sites the scientific study of professional tennis versus amateur tennis as an example. The scientist found that in professional tennis 80% of the points are won and in amateur tennis, 80% of the points are lost. Brilliant shots and exciting rallies are rare in amateur tennis. Instead the ball is all too often hit out of bounds or into the net, and double faults at service are very common. Rather than focusing on adding speed to the ball, and aiming closer to the line to improve the game and win points, amateurs are just concentrating on hitting the ball back and trying not to lose the point.

As a long time amateur tennis player, this analogy really hits home. Unless, I've got a big lead, I usually stick to the same game plan, and the outcome comes down to who makes the least amount of unforced errors.

Investing for retirement, however, is much more important than winning the weekend tennis match. So if your long term investment plan is well below your target, or if you are a new investor who has shied away from equities after the 2008 crash, you might want to pick up a copy of Winning the Loser's Game.

According to Ellis, there are 5 levels of investing:

  1. Setting the overall investment strategy and asset mix;
  2. Equity mix and proportions thereof;
  3. Active versus passive management;
  4. Specific fund selection;
  5. Active portfolio management - selecting specific stocks and executing trades.
The further down the list you go, the more expensive and time consuming the investment strategy becomes, and the least likely to add value.

If your time horizon is long-term 20-30 years, there's no point in trying to time the market. Stick with low commission index funds and ETFs for the majority of the equity portion of your investments rather than focusing on winning stocks. In the long run, the time and money spent on stock picking and market timing is unlikely to add value to your portfolio, and may hinder the results.

The book discusses many aspects of investing including asset mix, risk, inflation, policy, and performance measurement. Always focus on the endgame as opposed to the short and near term market swings.


Anonymous said...


Do you recommend this book or just giving an overview of what you are currently reading?

Among other readings, I am reading/studying a lesson per day from:
The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist (Wiley Trading)

So far, it is really good. The one lesson/day pace is good because most lessons require some thought and reflection in order to gain the benefit. I recommend Dr. Brett's latest book.

Jamie said...

Hey Jim,

Sounds like a good book. Maybe you can elaborate a quick review when you're done.

Winning the Loser's Game is recommended to a targeted audience as outlined in paragraph four.

I'm currently reading and really enjoying, Richard Smitten's
biography of Jesse Livermore.