The Loser’s Game

Has investing become a loser’s game?

When we watch top sports performances we often watch winners: The hundred-mile-an-hour fastball, the service ace in tennis, the 300-yard drive in golf. Winning elite-level sports competition is a winner’s game: you win by hitting winners. But your average hacker wins in sports by not losing: getting the tennis ball back over the net, hitting the golf ball down the middle of the fairway, getting the baseball into play.

In investing, some aspects are clearly loser’s games. Bond investing gives you a defined income stream and your principal back after a specific period of time. If the issuer defaults, you have trouble. Otherwise, boring is good. Clearly, the way to win in bonds is by not buying a losing issue.

Similarly in stocks, the way to outperform over the past year was to avoid issues like Citibank, Bank of America, and GE that lost 50 to 80 percent. While many losing stocks have come back, those issuer have stayed at depressed levels.

Other crises saw a similar pattern. By avoiding EMC during the dot-com bust or Enron and Worldcom in the middle of the decade, an investor could beat the general market. Avoiding losers adds as much value or more than picking winners.

Two things these losers had in common: they were all big, and they were so excessively complex that even their own managers had a hard time understanding them. Maybe winning at the loser’s game isn’t so complicated.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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