Common Errors/Mistakes of Investors

Wining the Losers Game

Ralph Seger

In the interest of full disclosure I used several sources for this memo:
1. The Losers Game by Charles Ellis published in 1975 in the Financial Analyst Journal.
2. Ten Ways to Win the Losers Game by Paul B. Farrell in the Wall Street Journal.
3. Your Finances are Under Control When by Jonathan Clements in the Wall Street
Journal of July 2004.
Why do some investors produce disappointing investment returns? It is probably because
they pursue a strategy that can best be described as a losers game. They take chances that
are beyond their skill level. They ignore tried and proven NAIC methods that over the years
have proven to be successful for the patient investor who is willing to learn and apply NAIC
basic sound fundamentals as improved over the years by numerous volunteers.
War, as we all know, is the ultimate Loser Game. As General Patton said, Let the other
poor bastard lose his life for his country.
Gambling, when in a casino where the home table is at least 20% of every pot, is a Losers
Game. The trouble with a Winners Game is that it tends to self destruct because it attracts
too much attention and too many players all of whom want to win (that is why gold rushes
finish ugly.) Those who speculate are not really investors, they are gamblers.
For those who are determined to try to win the Losers Game, however, there are a few
specific things they might consider. First, be sure you are playing your own game. Admiral
Morresen, citing the Concise Oxford Dictionary, says: Impose on the enemy the place and
conditions for fighting preferred by oneself. In investing play the tried and proven NAIC
investment game as originated by the late George A. Nicholson, Jr. Simon Ramo suggests:
Give the other fellow as many opportunities as possible to make mistakes, and he will do so.
Second, keep it simple. Tommy Arnold says about golf, Play every shot and youve got
the greatest chance of playing well. Every game boils down to doing the things you do best,
and doing them over and over again. Arnold again says, 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 detail. NAIC
principles are simple for those who try to understand them. However, it takes some effort and
diligence to learn by doing.
Third, concentrate on your defenses. Almost all of the information in the investment
management business is oriented toward purchase decisions. Competition in making
purchase decisions is great, but its too hard to outperform the other fellow in buying.
Concentrate on selling by avoiding losers.

Fourth, dont take it personally. Those who win have won all their lives by being bright,
articulate, disciplined and willing to work hard.
Simon Ramo identified the crucial differences between a Winning Game and a Losers
Game in his excellent book on playing strategy, Extraordinary Tennis for the Ordinary
Tennis Player. Over a period of many years, he observed that tennis is not one game, but
two. One game of tennis is played by professionals and a very few gifted amateurs; the other
is played by the rest of us. The basic nature of these two games is almost intensely different.
Professionals win points, amateurs lose points.
Professionals stroke the balls with strong, well aimed shots, through long and often
exciting rallies until one player is able to drive the ball just beyond the reach of his opponent.
Amateur tennis, Ramo found, is almost entirely different. In expert tennis, 80% of the
points are won; in amateur tennis about 80% of the points are lost. Amateur tennis is a losers
game.
Dr. Ramo explains that if you can choose to win at tennis as opposed to having a good
time the strategy for winning is to avoid mistakes by being conservative and keep the ball in
play, letting the other fellow have plenty of room in which to blunder his way to defeat. He will
make errors. He will make too many errors.
Finally, in this series of Common Errors/Mistakes of Investors I have outlined how to avoid
mistakes that over many years I have observed among those who request a Repair Shop
review. I have outlined corrective action and the way to not only avoid such errors/mistakes
but how to be a successful investor.
Here is what Paul B. Farrell says are Ten Ways to Win the Losers Game in investing:
The best part of any game is the halftime entertainment, especially when your team is losing
and you need distractions. So here we are at halftime 2006. The major stock indexes are
losing. Wall Street cheerleaders are upbeat, with one report saying that all the major topperforming market-timing newsletters are bullish on the rest of the year. But I look elsewhere
for support, to the wisdom of long-term investors.
One of the best sources is Charles Elliss classic Winning the Losers Game: Timeless
Strategies for Successful Investing, written in 1975 to help his fellow money managers
improve their game. Fund-industry veteran, Jack Bogle credits the book as the inspiration for
his first index mutual fund at Vanguard Group in 1976. (McGraw-Hill published a fourth edition
of the book in 2002.)
As the title suggests, financial amateurs rarely have a chance against the pros. We make
too many mistakes. Mr. Ellis says the trick for you and me is to be patient and minimize our
mistakes. Follow his ten rules and you can win the losers game:
1. Dont speculate. One big player says its time to jump aboard now, calling the market
a muscle car mired in the mud, soon to be unstuck. Another urges investors to gamble:
For higher returns, you need to get into riskier investments. Dont listen to the hype telling
you to take on more risk in this volatile market.
2. Your home is not a hot stock. You live in it. Today, many people mistakenly
assume that rising home equity means you dont have to save for retirement. Or that you can

use a home-equity loan to buy consumables. Or worse yet, use that money to buy more
property and play the real-estate market. When that bubble bursts, look out.
3. Save lots more. Americas savings rate has dropped from 10% two decades ago to
zero today. Were consuming like crazy, importing and running up large trade deficits, while
foreigners recycle our dollars into U.S. Treasury debt, justifying our failure to be frugal. This
game of musical chairs will end at some point, perhaps soon. And your failure to save will
haunt you in retirement.
4. Brokers arent your friends. There is an inherent conflict of interest between you
and every commissioned broker in the world. They make their living on commissions, and the
cost reduces your returns. They win and you lose.
5. Never trade commodities. Yes, you may want to add a small allocation of energy,
metals or other commodity funds to your long-term portfolio. But short-term trading is a losers
game, and a fast one. Commodity traders tell me that amateurs invariably lose all their risk
capital within 12 months to 18 months, and then quit.
6. Avoid new and exciting deals. With all the turmoil and risks domestically and
globally, chasing hot stocks and exotic opportunities is an instant replay of the irrational
exuberance that got us all in trouble in the 1990s. Stay the course!
7. Bonds also ride up and down. Mr. Ellis reminds us that in all the short term, bond
prices go up and down like stocks. However, you can increase your chances of winning the
losers game by using bonds to counterbalance stock cycles in building your portfolio. Be
aware that fixed income securities such as bonds, preferred stocks and CDs provide no
protection from inflation.
8. Never invest for tax benefits. Every year my accountant reminds me of this rule. All
decisions should first make sense as an investment. Tax benefits, if any, are frosting on the
cake.
9. Write goals and stick to them. Create a well-diversified, long term asset-allocation
strategy; a budget and a savings plan, with regular money going into a retirement program.
And start living below your means and save money now, because later will be too late. Write
down your investment objectives and stick to them.
10.
Never trust your emotions. The new science of behavioral finance makes it
clear that investors are their own worst enemies too optimistic against impossible odds.
Professional players own the game. They have more information sooner than you have, and
they have more capital to play with. And they spend all day playing while you work for a living.
Youre an amateur. Admit it. Never play the game by their rules. Your emotions will trigger
too many mistakes. Follow these ten rules and youll win the game.
Jonathan Clements says Your Finances are Under Control When
You will probably have to work 30 or 40 years before you amass enough money to quit
your job and live off your savings. But that doesnt mean you have to spend those 30 or 40
years fretting about money.

Indeed, while true financial independence may take decades, you can achieve a sense of
financial freedom in just a few short years. How do you know when youve finally got your
financial life under control? Here are signs that youve become a savvy investor and a smart
saver:
1.
2.
3.
4.
5.

Shopping is no longer your favorite hobby.

You get excited when stock prices fall.
Youre richer than your neighbors, and they havent a clue.
You save part of every paycheck.
You may not make your heirs wealthy. But youve ensured they wont inherit a
nightmarish financial mess.
6. You remember your investment mistakes, and they still make you shudder.
7. Before you buy an investment, you think about when you will need to sell.
8. You arent 100% sure about anything.
9. You never open your credit card bills with trepidation.
10. You can bring yourself to sell losing investments.
11. You could easily afford to buy a new car.
12. Whenever you hear about somebody with a huge house and a driveway full of new
cars, you dont wonder how rich they are. Instead you are in awe of the staggering
sums they must have spent.
13. You never thought of Beanie Babies as an investment.
14. You still havent figured out how to beat the market. But youre a whiz at cutting
investment costs and trimming your portfolios tax bill.
15. You think CNBC is full of useless insights, but you enjoy watching it anyway.
16. You are filled with horror when your neighbors describe their latest meeting with
their broker.
17. Your retirement dreams dont hinge on beating the market or earning double-digit
annual returns.
18. Sure, you want the big house, early retirement, the fancy vacations, and the kids to go
to Harvard. But you long ago realized you couldnt have it all.
19. Yes, you worry about a market crash. But what really scares you is not having enough
money in 30 years when you retire.
20. Youre appalled whenever you see somebody buying lottery tickets.
21. You realize remodeling the bathroom is a money loser.
22. You have all the insurance you need, and no more.
23. You can always make the maximum possible 401(k) contribution.
24. You would love to sell your house and buy a bigger one. But you get queasy thinking
about the brokerage commission and increased taxes involved.
25. When the TV talking heads throw around technical jargon, you dont understand what
theyre saying. But youre pretty sure it is garbage.
26. You never do anything just to earn frequent-flier miles.
27. You have no idea which part of the market will perform best over the next year. But
because youre well diversified, youre pretty confident some part of your portfolio will
make money.
28. You earn more than your brother-in-law, but dont live nearly so lavishly.
29. You wince when you think about the time you carried a credit-card balance and ended
up paying 17% in annual interest.

Finally, here are my reasons for selling a stock which are the opposite from those buying.
Reasons for Selling:

Adverse management change

To improve quality of stock grossly overvalued

To restore appropriate diversification

Declining profit margins or financial condition

Single product or single customer

Disappointing growth compared to expectations

Take a tax loss

As an acquirer price declines

If price declines below the low in your SSG

Wrong reasons for selling:

Price does nothing

To take a profit

Temporary bad news

Wrong reasons for not selling:

Emotional or psychological attachment

You hate to take a loss

You cant understand a tax loss situation