Is investing a winner’s game or a loser’s game?
The difference between a winner’s game and a loser’s game in investing
Investing can be viewed as either a winner’s game or a loser’s game, depending on the approach taken by investors. In a winner’s game, the outcome is primarily determined by the excellence of the winner. This is often the case in professional tennis, where the victor is the one who consistently hits the most winning shots. On the other hand, investing can also be seen as a loser’s game, where the outcome is determined by the mistakes made by the loser. This is similar to amateur tennis, where the winner is the one who simply keeps the ball in play while the opponent makes errors.
The importance of minimizing investment errors for success
When it comes to investing, basic math clearly favors those who minimize investment errors. Even a single large loss can significantly impact overall returns. For example, an investor who experiences a 50% loss in one year would need a 100% gain in the following year just to get back to even. And if the loss is even greater, such as 80%, the required gain to break even becomes even more challenging at 500%. This highlights the importance of avoiding large setbacks and minimizing investment errors to maintain consistent growth.
The challenges of recovering from large setbacks in the stock market
The past two years have demonstrated the difficulty of recovering from significant setbacks in the stock market. Take the “Magnificent Seven” stocks, including Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia, and Tesla, for example. These companies, fueled by excitement over Artificial Intelligence and Battery Electric Vehicles, saw an average gain of 89% in 2023. However, they also experienced an average loss of 46% in 2022. While investors who held onto these stocks for the entire period may not be ahead, they are still in the game. Recovery was possible because the underlying businesses of these companies were fundamentally sound, despite investor sentiment turning against them.
Unforced errors that winning investors must avoid
Winning investors must be vigilant to avoid unforced errors that can lead to irreparable damage to their portfolios. One example of such an error is Silicon Valley Bank (SVB), which had a flawed business model. SVB took in uninsured deposits that earned zero interest and invested the money in long-term mortgages with relatively low returns. When interest rates rose, the cost of maintaining deposits exceeded the earnings from mortgages, causing significant financial strain. Additionally, the value of the mortgages declined, exacerbating SVB’s troubles. Ultimately, the bank had to file for bankruptcy due to its unwise investment decisions. Other common unforced errors include investing in money-losing companies with the hope of striking it big, as well as betting on overhyped fads that may quickly lose their appeal.
The desire for victory in investing: hitting the unreturnable shot
Just as every tennis player aims to hit an unreturnable shot, every investor, whether professional or amateur, yearns to find the golden investment among the vast sea of choices. However, it is important to remember that it is more enjoyable and rewarding to actually win the game, rather than simply focusing on the accolades or bragging rights. Winning in investing requires discipline, avoiding costly mistakes, and maintaining a long-term perspective. While the desire to make impressive gains and discover the next big thing is natural, it is crucial to stay grounded and focus on consistent and informed investment strategies for long-term success.
Analyst comment
Neutral news: Is investing a winner’s game or a loser’s game?
Analyst prediction: To be successful in investing, it is crucial to minimize investment errors, recover from setbacks, and avoid unforced errors. Discipline, informed strategies, and a long-term perspective are key for consistent and long-term success in the market.
