At Marcellus, we believe in risk minimisation as a means to help our clients fulfil their financial goals as opposed to return maximisation. See our blog here for more details. Of course, we aren’t the first to believe in the merits of reducing the odds of losing money. The great Charley Ellis wrote the fabulous book “Winning the loser’s game” and as was Warren Buffet’s ‘Avoid the Zeros’ principle. In this blog, Nick brings out the concept beautifully, doing what he does best – crunching data to provide objective quantified illustrations.
“Imagine you have a choice between two assets to invest in:
Asset A returns +4% in 99% of periods and –96% in 1% of periods. The expected return for this asset in one period is +3%: (0.99*0.04)+(0.01*–.96)=0.03.
Asset B returns +1% in all periods.
Given these options, which asset would you prefer to invest in?
If you had to invest for only one period, most of you would likely pick Asset A, because odds are you’ll land a +4% return. But what if you had to invest for 100 periods — or 1,000 periods?
To test the outcome of these scenarios, I ran 1,000 simulations of each asset, with the assumption that you invested $1 into each.”
Whilst the outcomes are best visualised in the charts in the article, what Nick essentially shows is that over the long run Asset B delivers better outcomes than Asset A.
“Why does this happen? While Asset A has higher returns than Asset B in most periods (4%>1%), Asset A also has catastrophic returns in some periods that it cannot make up for in the long run.
Put another way, Asset B performs better because it “avoids the zeros”—the large, infrequent losses—unlike Asset A.
….I used to think my edge in life was being smart, but it really isn’t. My edge is being not stupid. There’s a big difference.
Case in point: Myron Scholes, the Nobel Prize–winning economist, is far smarter than I am, yet I have the better-performing investment record. Anyone who knows about Scholes’ magnificent losses with Long-Term Capital Management (LTCM) can attest to this.
How is it possible that a Nobel laureate can have a worse investment record than a typical investor like me? Well, it turns out that the Nobel Prize winner played a stupid game. In the case of Myron Scholes and LTCM, that stupid game was called leverage.
How do I know it was stupid? Because if Warren Buffett only levered 1.6-to-1 throughout his career, why would you ever go beyond this limit, let alone 50 times over it, as LTCM often did?
As the saying goes, “Play stupid games, win stupid prizes.” So, don’t play.”

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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