Chapter VI

Chapter VI: Investing Is a Loser's Game

6 min · 12 ideas

There's an old saying in the investment world (one Howard Marks often quotes, too): "There are old investors, and there are bold investors, but there are no old bold investors."

1. Defensive Investing

In 1975, the investment consultant Charles Ellis wrote about a tennis analogy that I've never forgotten. Watch professionals play, and most points are won by the player's own shots: whoever attacks best wins. That's a "winner's game." Watch weekend players like us, and most points are gifts from the other side: the ball goes into the net or out of bounds, and whoever makes fewer errors wins. That's a "loser's game." In the stock market, almost all of us are weekend players. For the vast majority of people, investing is a loser's game — the one who makes fewer mistakes wins.

After all my years in the stock market, the only thing I dare to predict is that it can't be predicted. Someday, something will happen that nobody saw coming. Murphy's Law, as it's known in the West, says the same thing: anything that can go wrong eventually will; things are usually more complicated than they look, and take longer than you expect. Since mistakes are sure to come, rather than thinking about how to win, think first about how not to lose.

Howard Marks calls this attitude "defensive investing," and he argues that you should invest scared. As I understand it, whenever you invest, you should keep three worries in mind: Could I lose money? Is there something I don't know? Even if my judgment is right, could bad luck or something unexpected still hurt me?

Marks believes the core of defense is a "margin for error" — leaving a cushion around your own judgment. What you buy should have real, lasting value; the price should be reasonable, ideally cheap; don't borrow; don't put all your eggs in one basket. Do this, and in a roaring market you'll make a little less than others, but when the bad days come, you'll have the best chance of coming through unharmed. He has a line I love: "Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average." The average looks safe; what really kills you is the deep hole in the middle that you didn't see.

For a family that buys only broad-market ETFs, defensive investing means:

1. Not borrowing and not using leverage;
2. Diversifying across the whole world;
3. Keeping a full emergency fund, plus the money you'll need in the short term;
4. Investing a fixed amount every month for life, without letting fear or greed change that.

My Investing Rules

The Korean entrepreneur Kim Seung-ho put together a set of investing principles that struck a real chord with me. The eight rules below draw on his ideas, which I've added to, trimmed and rewritten based on my own experience — the first six come from Kim Seung-ho, and the last two are my own:

1. When you see a job or opportunity that promises "big money, fast," turn around and walk away;
2. Never touch a business that harms human life or goes against your conscience, however much it pays;
3. Don't buy what you don't understand;
4. First trade your time for money; then use money to buy your time back;
5. Don't chase what has already shot up;
6. When a crisis comes, buy a little more; when a craze comes, stay a little calmer;
7. Think in units of at least ten years;
8. No borrowing, no leverage, no hot tips.

2. The Market Thermometer Checklist

I used to use an "investment assessment sheet" to judge what stage the stock market was in and whether to get in or out. Once I gave up "selling at the highs," the sheet's purpose changed too: it no longer tells you when to sell. Instead, it helps you see clearly how hot or cold the market is right now, and reminds you not to run away when you're afraid and not to act on impulse when you're greedy.

The data (monthly figures, refreshed automatically every week) is on this book's website, under "Market Thermometer."

How do you use this table?

• In normal times: I keep investing a fixed amount on my usual schedule. There's no need to check every day.
• Whether to invest extra: my rule for adding more is written down in advance (Chapter V, Section 3): only when I have new income and the index is more than 20% below its high do I invest extra. I don't use the thermometer to guess the bottom.
• When it's very hot and greedy: I don't borrow, don't raise my bets and don't pile on more. I check whether stocks have grown beyond the share of my total assets I originally set, and if necessary, I use new money to buy bonds or add to savings to bring the balance back.

This table is for managing your own emotions, not for predicting whether the market will rise or fall tomorrow. I used to use it to call the highs, and I got it wrong (see Chapter V, Section 6).

Key Takeaways

1. Investing is a loser's game: whoever makes fewer mistakes wins.
2. Defensive investing = investing scared and leaving a margin for error: no leverage, diversification, an emergency fund, and steady dollar-cost averaging.
3. The thermometer is only for seeing emotions clearly: when it's cold, remind yourself not to run; when it's hot, don't borrow and don't pile on more.