I’ve met very few highly successful stock market “investors” or “traders” and I could not help but notice a very specific pattern as to why most people fail to make money investing in stocks. We all seem to understand that the stock market goes up over time (with a long-run average return of 9% p.a.) but yet many individuals fail to even achieve the market average or worse yet, erode their capital. So let’s look as to why…
Charles Ellis, author of the classic investment book “Winning the Loser’s Game” once made the assertion that professional tennis is a “winner’s game” while amateur tennis is a “loser’s game”. At the professional level, the game is determined by the skill of the superior player and their ability to place shots perfectly and hit winners. However, at the amateur level, the adversities of the game itself are the primary challenge to overcome. The outcome is determined by the player who “loses” the least number of points, the one who makes the least “unforced errors”. Validating this assertion, statistics have shown that 80% of points at the professional level are “won”, while at the amature level 80% of points are “lost”.
Investing used to be a “winner’s game”, such as during the 60s and 70s, whereby extensive research and analysis would provide an edge over the other market participants which were generally individual retail investors. In fact in the 1950s, 90% of stocks were held by retail investors compared to less than 30% in the 2000s and has likely come down further since. Thus the edge that once existed has eroded significantly over time. The equity markets of today are so well covered by some of the smartest people in the world with the most advanced research tools – the adversities of the game itself has now become so difficult that it has become a “loser’s game” comparable to the amatuer tennis. Investing is a game where the margin for error is slim – historically the long-run average is 9% p.a. and it doesn’t take many mistakes to quickly wipe that down to a loss.
Investors who are not well prepared, who do not understand the nature of the game in which they are playing, and who do not understand the criticality of eliminating “unforced errors” continue to underperform the market or lose money time and time again.
We don’t profess that we’ll always be right – far from it, in fact. We expect to be wrong as we understand that not every point will go our way. What we do focus on is perfecting our process, bolstering our preparation and playing to our strengths to eliminate the “unforced” errors.
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Blackbird Capital 