Amateur Tennis and Investing Glory

What do Tennis players and investors have in common?.

Not much, surely.

Could you think of a couple of more apparently unrelated activities?. There’s little shared between those at the top the ATP rankings and successful investors. Physical fitness is certainly not one of the common traits. In fact I can think of few activities that are less taxing on the body than indulging in the capital markets.

Shift your focus away however from the Federers and Nadals of this world and towards your average amateur player and you’ll begin to see an emerging picture… Come to think of it, for those of you that partake in the sport, what is the single most important determinant of the outcome in most of your games?.

High ace count? I doubt it.

Blistering fore-hand winners?. Probably not.

Inspired cross-court volleys?. I don’t think so.

How about just consistent reduction in unforced errors?. Yep, that’s it!.

For most of us, and I certainly include myself in this category, tennis is a “loser’s game” with the match going to the player who hits the fewest losers. The same can be said for successful, sustained, long-term investing performance.

I mention this after reading a following wonderful analogy in Howard Marks’ “The Most Important Thing”; itself taken from an article published by Charles Ellis back in 1975 in the Financial Analysts Journal.

Below follows a rather long but eloquent transcript from Mr. Mark’s book which illustrates beautifully the concept:

“His views (Charlie Ellis’) on market efficiency and the high cost of trading led him to conclude that the pursuit of winners in the mainstream stock markets is unlikely to pay off for the investor. Instead you should try to avoid hitting loser. I found this view of investing absolutely compelling.
The choice between offense and defense investing should be based on how much the investor believes is within his or her control. In my view, investing entails a lot that isn’t.

Professional tennis players can be quite sure that if they do A, B, C and D with their feet, body, arms and racquet, the ball will do E just about every time; there are relatively few random variables at work. But investing is full of bad bounces and unanticipated developments, and the dimensions of the court and the height of the net change all the time. The workings of economies and markets are highly imprecise and variable, and the thinking and behavior of the other players constantly alter the environment. Even if you do everything right, other investors can ignore your favorite stock; management can squander the company’s opportunities; government can change the rules; or nature can serve up a catastrophe…

...the bottom line is that even highly skilled investors can be guilty of mis-hits, and the overaggressive shot can easily lose them the match. Thus, defense – significant emphasis on keeping from going wrong – is an important part of every investor’s game”.

So you see, apparently, even us dull “plodders” stand a chance of reaching ultimate investing success.

If only we approached the markets in the same way as we relentlessly return the ball to the open court…