Olympic athletes work hard to win a medal. But in investing, one way to become a winner is to not even attempt to win.
SMI's executive editor Mark Biller explained what that means on Monday's edition of MoneyWise Live from Moody Radio.
If you missed the program, you can listen below. Or scroll down for the transcript.
MoneyWise Live, with host Rob West, airs daily at 4:00 p.m. ET/3:00 CT.
For more archived radio appearances by members of the SMI team, visit our Resources page.
(opening music) Proverbs 13:11 tells us "Wealth gained hastily will dwindle, but whoever gathers little by little will increase it." Applied to investing, it means patience is a virtue.
Hi, I'm Rob West. All too often, impatience can be costly — especially if you're trying to time the market. Investing expert Mark Biller joins us today to tell us how to win at that game without really trying.
Then, it's on to your calls at 800-525-7000. This is Moneywise Live — biblical wisdom for your financial decisions. (theme music ends)
Well, Mark Biller is the executive editor at Sound Mind Investing, where they've found an interesting analogy to investing in — of all places — competitive tennis. Mark, welcome back.
Well, it's great to be back with you, Rob.
So let me guess: stock prices go up and down like a tennis ball going back-and-forth over the net? Maybe something like that?
Well, no — although I kind of like your analogy actually. What we're referring to here today, Rob is investors trying to "beat the market." And just like with tennis players, we could say that they're amateurs and there are professionals that are both trying to win at that game. But, you know, beating the market is really hard. And the inconvenient truth of professional investing is that most actively managed investments — and we're talking about most mutual funds, advisor portfolios, newsletter strategies, and so on — most of them failed to outperform the broad market over time.
And so, we had this setup where traditional money management is largely based on the assumption that professional managers can consistently beat the market through their research and risk-taking and exploiting the mistakes of other investors, and so on. And while some do for a season at least, this assumption has largely been debunked overall. And so for many investors, then, the secret to winning this money game may be in not trying to win.
Interesting. And I suspect this is where we get a tennis lesson, right?
That's exactly right. So we have to go back to the 70s where this electrical engineer wrote a book on tennis strategy for amateurs. It was called Extraordinary Tennis for the Ordinary Player. And in it, he talked about how amateur tennis is really a "loser's game," which means that most of the points — about 80% of the points — in amateur tennis are actually won by the other player making a mistake. So for amateur players, he made a very strong argument that the key to winning isn't actually in trying to hit all these winning shots. It's letting your opponent beat himself by not making mistakes yourself and waiting for them to make a mistake.
Now, he contrasted that kind of loser's game in amateur tennis with the very competitive "winner's game" of professional tennis. And whereas with the amateurs, 80% of the points were basically lost by the opponent, in professional tennis, about 80% of the points were won by one of the players making a particularly powerful or well-placed shot. So the experts win points, the amateurs lose points.
Hmm. Fascinating. Because obviously we would think that anyone playing tennis would want to win points, but in the amateur category, that's clearly not what they found.
Yeah, that's exactly right. It was this wild symmetry really of about 80% losers on the amateur side, [80%] winners on the professional side.
And so as we try to relate this to investing, we need to turn to another book, which is pretty famous, called Winning the Loser's Game by money-manager, Charles Ellis. So Ellis took this tennis work and applied it to the investing arena. He noticed that it was about 80% of the stock and bond managers were underperforming their respective markets. And so in their efforts to "score points," if you will, for their shareholders, they were kind of doing the investing equivalent of hitting the ball out of bounds or into the net. And so to Ellis, it seemed clear that investing had actually become a "loser's game."
Our guest today is Mark Biller. Mark is the executive editor at Sound Mind Investing. Stay with us. Much more to come on MoneyWise Live.
Today, we're talking tennis well, how investing relates to tennis. And, Mark, I'd love for you to take what you shared just before the break about this fascinating research about amateur versus professional tennis and apply it to today's investing decisions, whether we choose active managers or passive index approaches, which seem to be gaining popularity.
Yeah, sure. So, to kind of put a bow on what we were talking about earlier, one of the things that, that isn't necessarily obvious to today's investors is just how much the investing landscape has changed. And this is one of the things that Ellis was really getting to in his book, which was — you know, I think a lot of investors would think, "Well, if all this is true, then why are there all these active managers? How did this industry develop the way it has?"
And one of the things Ellis points out in his book is that a few decades ago the industry was totally different. The act of investment manager at that point was competing with a totally different group of investors. There were a lot more amateur investors, a lot of cautious custodial-type managers. And so it was a much easier game for the professionals, quite honestly, beause they were competing with lower competition basically. It was easier to beat the market. That's just simply not the case anymore.
You know, today is investing arena, you've got thousands of professional investors — hedge funds, mutual funds, pension funds — that are in there all day, every day in an incredibly intense and competitive way. And so that's really the biggest reason why I think Ellis is saying that, especially for individuals, trying to compete in that arena is super difficult. And the odds of an individual just actively kind of winging it and picking stocks and doing that kind of stuff, you just have to realize who you're competing against on the other side of those trades. And it's a very difficult playing field.
As a result of all that, his main argument is that investing for individuals has really become a loser's game, like amateur tennis. So just like in amateur tennis, playing that loser's game means minimizing your mistakes and being patient — not trying to hit all these winning shots, not trying to figure out all of these clever investment ideas and strategies. You don't have to try to "win points" all the time as an investor. Instead, he's suggesting the more amateur loser's game approach for today's individual investors.
So Mark, what does that look like for the average amateur investor to play the loser's game?
Yeah, I think the obvious application there, Rob, is to rely primarily on low-cost index funds. You know, those index funds offer a lot of distinct advantages. One of which is they're very easy to set up into a simple portfolio. Maintenance on that kind of a strategy is very easy because usually it needs is maybe, once a year, annual rebalancing of a few funds.
And you know, this type of basic approach has done really, really well over the last especially dozen years or so. And that's really the big reason why index funds have become so popular and 401(k)'s and other retirement plans — anywhere really where individuals have to figure out their own investing path.
Yes. We, of course though, don't want to throw the proverbial baby out with the bathwater. You're not saying, Mark, that all actively managed funds underperformed, correct?
Yeah, that's right. And you know, to be fair, Sound Mind Investing relies primarily on active strategies. So I'm kind of talking against my own book here! But, you know, one thing that I think it's easy to forget, partly because indexing has performed so well in recent years, is there are periods where that flips and reverses. The entire decade of the 2000s, the S&P 500 index provided negative total returns — for that whole decade. You put money in at the beginning of the decade, you were down at the end of the decade. And that was a time when our active strategies did really, really well.
So there are some cycles to this performance, back and forth, even though indexing over time has outperformed as a whole act of management. I guess, Rob, we'd be more inclined to use this information to point out that there's a diversification benefit at least potentially to including more than one approach in your portfolio. You might want to have some index funds and some actively managed strategies or funds.
You know, again, though, I think the big takeaway for today is that individual amateur investors are just going to have a really difficult time trying to be active on their own. If you don't have a specific process that you have some reason to believe is going to provide an edge, then you just have to think about who's on the other side of this trade that I'm making right now. And chances are, it's a high-powered institutional investor with all of the research that money can buy at his fingertips, and you're playing against professionals most of the time when you're trading in the market.
Well, it also underscores the opportunity to have some professional expertise that's helping you navigate this. Talk for just a moment, Mark, about the work that you do at Sound Mind Investing in actually being that screening to select those mutual funds.
Yeah. Our approaches tend to be mechanical. So we're trying to take a lot of the emotional decision-making out of the process, and we're looking for these small edges that have held up over time that we can implement in a mechanical way. We're not trying to hit the ball out of the ballpark, but if you can string together a lot of singles and doubles, you can do really well as a long-term investor. Very different from a short-term trading strategy. That's not what we're talking about. Some people can do that well, but that's not a game that we try to play.
But we do think there are places where individual investors can pick up an edge by applying a consistent discipline. And I would say that that discipline, oftentimes — really both the buy-side but also a sell-side discipline to force yourself to get rid of investments when certain indicators say it's time — that can be a really big part of an investment process, both to protect an investor and just to keep the performance gains piling up consistently over time.
Very good. Well, Mark, this has been really helpful. And I think you know, as folks think about taking a properly diversified long-term view of investing, they need to recognize the investment landscape has changed. But there are more opportunities than ever to avail yourself of professional expertise to help you navigate this — because this is a high calling, managing God's money. We certainly want to follow biblical principles and handle his money in a way that seeks a return, but do it in a way that's wise as well.
Mark, we appreciate you as always stopping by, and today has been fascinating as we compared tennis to investing. Appreciate you being here.
Absolutely. Thanks for having me on, Rob.
All right. Folks, if you want to learn more about Mark Biller at Sound Mind Investing, you can read about today's topic and their investment strategies at soundmindinvesting.org. The article is called The Loser's Game That Can Make You a Winner. We'll be right back.