The Losers Game Analogy

October 4, 2018News, News Archive

Woodstock Quarterly Newsletter / Spring 2018

As a client sometimes we have to reassure our investment adviser that yes, we understand the risks in the present market but we are still committed to the investment strategy we have agreed to. In the investor guide, Winning the Loser’s Game, the ideal client/advisor meeting begins with reaffirming the existing strategy.[1] There may be reasons to change, but client and advisor should discuss and, if needed, spend the rest of the meeting getting to agreement on the change.

The Loser’s game analogy is to tennis where professionals try to hit winning shots and amateurs try not to hit losing shots. The double meaning is that even professionals in investment management have trouble deciphering the financial market’s short-term direction. The attempt to predict the market’s short-term direction using macro-economic thought processes, versus the micro-economic effort to determine the prospects for individual companies, has been called “the weather report”.

One of our favorite investment manager quotes is that this particular manager has “never been wrong but often been early”. The weather report is never “wrong”. It will rain or snow or hail sometime; it just may not be when predicted. The advantage of having two other “late cycle” markets in the last 20 years is that we can reflect on what worked then. As the “weather” turned bad in 1999 and in 2007 what was the best advice given by investment consulting firms? Overweight high quality US stocks [2] and have enough cash for emergencies. The historical advice that most Woodstock clients already know well is “don’t try to time the market”. The timing requires two perfect decisions: when to get out and when to get back in. The missing of only a few key days in any market cycle means that an equity-like return disappears to become a bond-like return and negates much hard work.[3]

Tinker around the edges of an agreed investment strategy? Of course. Pick less than high quality companies? No. There are high quality companies in the growth sectors of healthcare biotech and information technology and in the stable and irreplaceable sectors of energy and consumer staples. Because of recent volatility the prices for these impressive companies sometimes drop to the right price. How you and your investment manager decide to utilize the resources you have at your disposal is very important.

In recent academic studies another reason for thinking long-term, instead of short-term has popped up. All investors try to follow the maxim “buy low and sell high”. Hard to do anyway but especially true because it is counter-intuitive to whatever weather forecast is current. Now it turns out, in the very long-term, it may not matter. Very long-term studies over 120 years on world-wide markets show that “investors who bought after returns were high didn’t do markedly worse in the long run than those who bought after returns were low”.[4] Practically, it’s good to remember we all have to live in a term shorter than that and decisions made will matter.

We know that you are the most valuable business development tool that we have. Your referral of a friend, colleague or family member to us is the most important way that we grow.

We thank you for your support and want you to know that we are dedicated to serving your best interest.

William H. Darling, Chairman & President Adrian G. Davies, Executive Vice President

[1] Winning the Losers’ Game, C. Ellis, 2010, Appendix A; 1998 p.86
[2] Ask your investment manager for the source.
[3] Cambridge Associates, Standard & Poors and Thomson Datastream, 2011.
[4] WSJ 2/24-25/2018