It’s not about hitting winners – it's about keeping the ball in play

By Nic Andrew

I am an enthusiastic amateur tennis player having played a reasonable amount at school and university.

After a long break, lockdown has allowed me to start playing a bit more frequently – this time against my 15-year-old daughter as well as some men’s doubles. Both have highlighted some valuable lessons which can be applied very practically to investing.

Playing my daughter has taught me the value of experience. Despite vastly inferior ground strokes, I have managed to hang on to the top spot in the Andrew family rankings with a combination of sneaky drop shots and lobs and, if things are looking desperate, a few well-timed chirps!

Meanwhile, most of my men’s doubles is played with my university partner. We don’t play that often, but we still have a relatively good track record, especially against seemingly stronger opponents. I have often wondered why this is the case.

My partner recently stumbled on some academic research by prominent American physicist, engineer and businessman Simon Ramo which I think provides some insights.

Ramo wanted to improve his tennis game and applied the same rigorous evidence-based approach that led to his successful career. What he found was startling. In stark contrast to professional tennis, in the amateur game 80% of points are lost not won. “Lost” points are defined as those resulting from a player making an unforced error as opposed to hitting a brilliant shot that is impossible for an opponent return.  Clearly the best strategy is not to try to emulate Federer or Williams with a brilliant down the line topspin backhand winner. Instead  simply eliminate unforced errors and keep the ball in play.

This echoes the case that Charles Ellis makes in his classic investment book “Winning the Loser’s Game”  - in  that most investors end up defeating themselves by making avoidable mistakes. Here are some of the most common mistakes or unforced errors we often see:

Trying to time the market – it is often said that it is time in the market, not timing the market that is most important and sustainable strategy to good investment outcomes. Timing the market successfully is both extraordinarily appealing and extraordinarily difficult to get consistently right. The numbers are clear – as a group, unit trust investors do not get this right. A relatively simple way to measure this is looking at flows into the various unit trust sectors.

Post the significant correction in March 2020, the industry experienced enormous inflows into low risk money market and income funds. Since then, these funds have delivered single digit returns while some of the most unloved sectors (like SA equity) have delivered 50%+ returns.  This is a story that repeats itself time and again and highlights why having a sensible long-term plan and sticking to it materially increases one’s odds of success.

Buying the fad or the latest hot stock or fund - At any point in time, there will be one area of the market that has done brilliantly in the recent past. There will be a fund or a sector or a manager that  tops performance tables, generates headlines and attracts flows. Unfortunately, this is often after the stellar performance. I recently saw some research  (by portfolio manager Sean Peche) on the hottest US fund of 2020, the ARK Innovation ETF. In the year to March 2021, the fund returned a remarkable 170%. From March 2020 to March 2021, the Fund’s popularity soared, and it increased in size from $2 billion to over $22 billion. Unfortunately, however, because of when they invested, the average investor only received a return of 9%!

Not enough diversification – many of the saddest investment stories are of individuals putting all their life-savings into a ‘sure’ thing. Often this works for a while, until it doesn’t, and the resultant loss is devastating. This can be because of outright fraud or just bad luck. Diversifying one’s portfolio across stocks, asset classes, geographies and managers is a sensible thing to do to avoid disaster and help one to stay the course and deal with the surprises on the inevitably bumpy journey of investing.

Not focusing enough on net returns – gross returns can be appealing and attractive, but it is net returns that are the most important. These are the returns that pay the bills. Investors need to apply enough consideration to both costs (explicit and implicit) and taxes when assessing options. There are many simple ways to increase net returns by making sure you allocate tax efficiently – such as using your interest exemption, maximising your tax-free investments etc and making sensible use of low-cost options. These seemingly small adjustments can make a significant difference in the long-term.

Leverage – the use of debt can make returns look spectacular when things are going well (returns in excess of the cost of borrowing) but many investors, including some of the most sophisticated, have learnt the hard way that leverage works both ways and can be very cruel on the downside. Unfortunately, it is often at the worst possible time when prices are the lowest that borrowers demand repayment and ensure the loss is permanent.

As amateur but competitive tennis players, my partner and I have learnt that it pays to play unflashy cut returns to make sure we get the ball back, rather than going for glory. So too, in investing success is often about avoiding doing what seems appealing and chasing the ‘winners’. Rather just stay the course, by following some sensible, well tested and sometimes boring methods and your odds of success will be much more favourable.