Featured in the 5th May edition of 3L&3S
Farnam Street’s reiteration of its 2014 blog about a concept that we encounter everyday in our interactions with prospective clients. Most of us are enamoured with the hunt for undiscovered value or the big thematic plays that can go onto become multi-baggers, when portfolio after portfolio we find that the more successful ones are less about these multi-baggers than about avoiding the duds and the frauds. This piece drives home the point using the amateur tennis analogy elaborated in Charles Ellis’ award winning article The Loser’s Game. The piece has nuggets from Charles Ellis, Benjamin Graham and a gem from Charlie Munger to finish off.
“In his 1975 essay, The Loser’s Game, Charles Ellis calls professional tennis a “Winner’s Game.” While there is some degree of skill and luck involved, the game is generally determined by the actions of the winner.
Amateur tennis is an entirely different game. Not in how it is played or the rules but, rather, in how it’s won. Long and powerful rallies are generally a thing of the past. Mistakes are frequent. Balls are constantly hit into nets or out of bounds. Double faults are nearly as common as faults.
The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.
….The point is that most of us are amateurs but we refuse to believe it.
This is a problem because we’re often playing the game of the professionals. What we should do in this case, when we’re the amateur, is to invert the problem. Rather than trying to win, we should avoid losing.
This was a point Charlie Munger, the billionaire business partner of Warren Buffett, made a long time ago.
In a letter to Wesco Shareholders, where he was at the time Chairman (and found in the excellent Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger), Munger writes: Wesco continues to try more to profit from always remembering the obvious than from grasping the esoteric….It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, `It’s the strong swimmers who drown.”’
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