I was lucky enough to attend the Barclays ATP World Tour Finals at the o2 in London this week, in which pitted Andy Murray and Novak Djokovic against each other in the latest instalment of what is becoming an intense rivalry. Despite losing the first set, Djokovic Serb came back from behind to beat Murray 4-6, 6-3, 7-5.
As we discussed Murray’s impressive form this year, I was surprised to hear a friend describe the player as “simply a good “pusher”. In tennis terminology a pusher is a somewhat derogatory term for a player who, rather than attempting to hit a winning shot, is satisfied to return the ball with partial strength in the hope of getting the opponent to make unforced errors. Having watched him in action I can’t say I agreed with my colleague’s claim, but it did remind me of The Loser’s Game, the classic investment book by Charles D. Ellis. The investment strategist likened investing to tennis, a game where most victories are achieved not by making spectacular winning shots, but instead by making fewer errors than the opponent. If you consistently get the ball across the net and in the court, eventually your opponent will hit the ball into the net or outside the lines. Back in 1975, Ellis believed investment management had become a loser’s game. It was dominated by highly skilled professional money managers and, because their transactions made up the vast majority of market activity, the professionals as a group had to earn pretty much the market return. But these professionally managed pools have costs. Ellis argued that in order to outperform the market averages after these costs, an investment manager had to be able to outperform the other skilled pros by a significant margin. But, he asked, “how can institutional investors hope to outperform the market by such a magnitude when in effect, they are the market today?” His answer was simple: “They won’t and they can’t.” Index funds, he wrote, were one answer. But he also suggested that actively managed portfolios stood a better chance of winning the loser’s game by consistently following a disciplined investment strategy, keeping portfolio turnover low to minimise costs, and focusing on defence to manage risks. A low-cost, disciplined investment approach will rarely, if ever, result in the highest or the lowest investment returns in a particular period, because the top and bottom results are likely to be dominated by funds taking more risk. If Murray is indeed playing the loser’s game, he is clearly doing well at it. After all, you don’t get ranked No.3 in the world by taking too many risks, but perhaps you don’t win Wimbledon either.
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