The daily weather is comparably different from the climate. Weather is about the short run; climate is about the long run. And that makes all the difference. In choosing a climate in which to build a home, we would not be deflected by last week’s weather. Similarly, in choosing a long-term investment program, we don’t want to be deflected by temporary market conditions. – Charles D. Ellis; Winning The Loser’s Game – Timeless Strategies for Successful Investing
Charles D. Ellis is an investment consultant and one of the world’s leading thinkers in investment management. In 1972 he founded the international consulting firm, Greenwich Associates and began offering strategic investment advice to many of the world’s largest financial institutions. You could say that Mr. Ellis is the financial advisor to your financial advisor’s boss.
In 1975 Ellis published a book called “Investment Policy” in which he explained the financial “climate” around us and the essential steps investors should take to build long term wealth. The book was originally aimed at institutional investors, the people who make strategic decisions for banks, pension funds and the largest mutual fund organizations but with the advent of the 401k plan in the US and the increasing popularity of RRSPs in Canada he soon realized that more and more individuals were taking control of their own investment plans and could benefit from knowing the strategies being employed by his large clients. The third edition of Investment Policy was released in 1998 under a new title “Winning the Loser’s Game – Timeless Strategies for Successful Investing”, and marketed for individual investors.
Ellis explains that a winner’s game is a game in which you out match an opponent and win because you are better than they are. A loser’s game on the other hand is a game in which players are evenly matched and the “winner” just makes fewer mistakes than the “loser”. The best example I can think of to describe a loser’s game is to think about how children learn to play chess. The game is complicated and mastery of it takes years, when they first start to play children are far more likely to win if they simply make fewer mistakes than their opponent. Beginners don’t so much “win” a chess match as they outlast their opponent long enough not to lose.
The stock market is a loser’s game simply because there are so many smart players, all with equal access to information about the companies they are buying and selling. If you are trying to “beat” the market with your skill at stock picking you are essentially trying to outsmart some of the smartest people in the world. Not only that but those super smart people are looking at the same information that you are. Your only hope at “winning” is for a large number of the players to simultaneously make a mistake and for you to have the fortitude to resist the consensus.
It does happen once in a while, but not enough for anyone to consistently beat the market over the long run. In fact, over a rolling 15 year period dating all the way back to the mid 19th century the New York Stock Exchange has lost money only once. The Toronto Stock exchange has never lost money over a rolling period of 10 years or more. This makes beating the market, winning when everyone else is losing, exceedingly hard. Nobody does it consistently for long so Ellis’ strategy is simple – if you can’t beat them, join them.
Ellis uses the analogy of weather and climate extensively throughout the book to explain the difference between short term and long term investing strategies. Weather happens and is largely unpredictable climate takes longer to unfold and is relatively predictable.
I can’t tell you if it might snow tomorrow but I can tell you that it is highly unlikely for it to be 30 Celsius for at least another 4 months. The more data you can bring to your analysis, the longer your outlook and the broader the sampling of stocks (and bonds) you can purchase, the more predictable your returns will be. It is through this extreme diversification and a long term outlook that you can virtually eliminate risk from your portfolio.
Will the stock market go down tomorrow – maybe, I really couldn’t say for sure. Will it rain? No clue. Will the stock market gain over the next 20 years? Again I can’t say for sure but it’s never lost over that long before so it’s a pretty good bet, just like it’s never been 30 Celsius in February so I think I’ll wear a coat.
You can win the loser’s game. All you need to do is play not to lose and you’ll be just fine.
Lauren C. Sheil is a serial entrepreneur who has been in business for over 25 years. He has operated a small farm, a recording studio and a music manufacturing plant, and has written 3 books on Economics, Ethics and Spirituality. He has presented his ideas to business owners and leaders from all over the world. His latest book “Meekoethics: What Happens When Life Gets Messy and the Rules Aren’t Enough” is available on Amazon.com.
Mr. Sheil is currently a Financial Security Advisor and Business Planning Specialist with one of Canada’s premier financial planning organizations. He brings to his work a passion for people and a desire to teach everyone to live life to the fullest while Eliminating Debt, Building Wealth and Leaving a Legacy.
He can be reached at firstname.lastname@example.org or by calling 613-295-4141.