Investing is probably the ultimate loser’s game, argues Hannes Viljoen. But you can win a loser’s game by making the least amount of mistakes.
2019, Gymnastics World Championships in Stuttgart. At 22 years of age, an attempt was made to perform the most difficult move in gymnastics.
A gymnast has two attempts at a vault, the average of the two scores is used for the final result.
In her second vault, she performed a “Yurchenko double twist.” A vault that requires enormous skill. She received a score of 14.733. But by that time it was all over anyway, because of her first vault.
In her first vault, Simone Biles performed a variation of the Yurchenko, a double-twisting, double backflip, scoring 15.399. With an average score of 15.199, she secured the gold medal.
This variation is now called, the “Biles”.
Sports fan or not, true skill is gaspingly beautiful and not something you stumbled upon. Ask any amateur tennis player if they have tried a one-hand backhand down the line, à la Roger Federer, and if they have been successful, the second follow-up question should be, “out of how many attempts?” To do this consistently well requires true skill. True consistent skill is what is required to play and win in a winner’s game.
In a winner’s game, winning is achieved through making brilliant decisions and executing exceptional plays. The outcome here is determined by the actions of, at the end of the game, the winner. You need to hit more winners than your opponent. You need to make more runs than the other team. You need more points in a rugby or soccer game. You get the point: In a winner’s game, you need to do something better than your opponent to prosper.
Amateur tennis is an example of a loser’s game: The person who wins the game, is not the one that hits the most winners in the game, but the player that makes the fewest mistakes.
Sahil Bloom made this point in a fantastic article titled “Winner’s Game vs. Loser’s Game”. The moral of the article is: You win, in a loser’s game, by making the least amount of mistakes.
Investing is probably – “probably” because I work in the industry and find it fascinating – the ultimate loser’s game.
Make the fewest mistakes and your odds of reaching your objectives rise exponentially. Yes, exponentially, because compounded growth is the pot of gold at the end of the rainbow.
These are some of the most common mistakes:
Selling when the market is down, as fear grips, and investors believe they just can’t go on, they might lose everything.Trying to time the market by selling and buying at the “optimal” times. Irresponsible leveraging up in the search for outsized returns. Chasing investment returns just because they have been good in the past. Not paying attention to fees. Not doing thorough due diligence on an investment or investment manager.
The list is not exhaustive, but the point is made.
What if we stopped trying to win? What if instead, we tried not to lose? How would we go about trying to not lose?
For this approach, first we need to understand why so many investors keep on losing.
Emotional decision-making is in all probability the number one reason why investors do not reach their objectives, or in sport terminology, their true potential.
The investment management giant Morningstar publishes an annual Mind the Gap report. In its study of US mutual funds and exchange traded funds (ETFs), they estimate that over a 10-year period (to end-2023), investors earned 1.1% less per year than the underlying fund’s return because of “mistimed purchases and sales”.
Closer to home, Momentum Investments produces an annual Sci-Fi report, that investigates the “behavioural tax” that investors paid in a given year due to switching between portfolios. Their latest report, for the past year, 2024, indicates a behavioural tax loss of between 3.53% and 4.26% (depending on which investment wrapper is referred to).
How would you go about to reduce the emotional impact on your investment portfolio?
For some investors, a rules-based approach is worth a try.
In a rules-based approach investment principles and beliefs are determined, and rules are set and followed irrespective of underlying market conditions.
An example of a rules-based investment approach:
Rule 1: Do not try to time the market. Set an asset allocation, in line with your investment goals, rebalance at a set interval, religiously. No one can win in timing the market.
Rule 2: Index funds for your equity allocation. Don’t try to win by selecting a manager that tries to outperform the market. Buy the index.
Rule 3: Active managers for income and bond allocation. Do a lot of work to find someone that can outperform the index, over time, as the index construction is not optimal, and stick with them. No chasing the hot new manager.
Rule 4: Don’t break any of the rules.
Simple, but this can be effective when executed.
Here’s a rules-based approach to wealth management:
Rule 1: Max out tax-favourable investment wrappers first in your Retirement Annuities and Tax-Free Savings Accounts.
Rule 2: Follow the investment-based principles set out in investment rules.
Rule 3: Left-over discretionary funds should be invested offshore via an endowment.
Rule 4: Revise your estate plan and will annually.
Simple, but also effective if executed.
I love sport and probably underappreciate true skill. I am ecstatic that my daily worry does not consist of success being measured by landing a double-twisting, double backflip, a game of Padel nowadays strike injury-fear into most middle-aged folk.
Investing can be made simple, but do not be fooled… simple is hard!
Hannes Viljoen, CFA, CFP®, is the CEO and head of investments at Kudala Wealth. News24 encourages freedom of speech and the expression of diverse views. News24 encourages freedom of speech and the expression of diverse views. The views of columnists published on News24 are therefore their own and do not necessarily represent the views of News24.
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