The Economy, Charlie Ellis and Lessons from Losing at Ping Pong

In May of 2015, when Jacob was scheduled to move out, I wrote this blog. His moving out was good for the economy as it results in one more household formation which, fortunately, has been growing quite nicely.

[2015] On the other hand, I will miss him although he won’t be moving too far away. One of the things I will miss will be our near-daily ping pong matches which take place when I’m in town. We always play three games which until recently I won every single one, somewhat akin to the legendary John Wooden UCLA basketball teams which had won 88 games in a row.

Like UCLA, however, in 1974 against Notre Dame, my son improbably came from behind while down 20-15 to win 24-22. It was quite an astonishing upset. I chalked it up to being largely a fluke…until…it happened again. The second victory was even more impressive and very instructive for investors.

One Insight Can Make a Big Difference

For most of our matches, Jacob would focus quite a bit on making big shots and hitting the ball hard when the opportunity presented itself. He wanted the thrill of the victorious power point. Unfortunately, they often either hit the net or missed the table.

I told him that a very famous person in the world of investing, Charlie Ellis, wrote a seminal article that equated investing to amateur tennis which he characterized as a “Loser’s Game”. What he extrapolated from research done about amateur tennis is that most people win by making the fewest mistakes as opposed to crafting winning shots. Professionals come out on top by making the most winning shots while amateurs win by having the fewest errors.

Most people win by making the fewest mistakes as opposed to crafting winning shots ~ Charles D. EllisClick To Tweet

 I could see almost immediately that Jacob took this to heart as he began to focus on keeping the ball in play versus trying to make winning shots. This served to raise the odds of me making a mistake because the more shots I had to keep in play, then naturally the odds of making an error inevitably went up.

 Interestingly as his play got better it turned out that we would have more winning shots as the skill level increased and this became more necessary to be successful. It was harder to count on him to make a mistake so I had to think of ways of manufacturing winning shots.  At the same time, however, I found that he also started getting into my head a bit and that as he got better I was thinking how much more consistent he was and that maybe the only way I could beat him was to go for a riskier, winning shot. This created a little less confidence in me because I knew these were much harder to make and I was more prone to error than if I just focused on keeping the ball in play. His better play increased my potential for mistakes relative to the past.

One of the benefits of his improvement is that it is now for fun to play with him since it’s a lot more challenging and it now takes greater concentration which puts me in more of a flow and an improved state of mind.

The Economy – Investor Lessons

From an investor’s perspective, there are a lot of parallels. Charlie Ellis believes that it is extraordinarily difficult to beat the market so investors should focus on minimizing costs and avoiding big mistakes. This is one of the reasons why index funds and ETFs have proliferated so significantly over the last 10 years or so. It allows investors to have a relatively low-cost exposure to various aspects of the market and if they can stay the course, have a long-term perspective, and avoid falling prey to being subsumed by waves of fear and greed, then they can build up a nest egg over a long period of time.

Even for a professional firm like CWS, the first thing we focus on is downside protection. We also believe that we can improve our odds of winning significantly by avoiding big mistakes. Once we feel like the downside is manageable, then we can focus on the upside. This is what makes us different than individuals investing in the stock market. We can effect change since we are buying businesses (apartment communities) in which we select the management personnel and influence the capital allocation decisions. If we do our job well then we will have picked the right properties in improving locations and added value through our very talented, focused, and committed management teams. Like playing a very competitive game of ping pong I have found that it also more fun to earn compelling investment returns from intelligence, diligence, gumption, wisdom, and courage versus simple luck or having it handed to us on our silver platter.

Although I never want to lose money for our investors, when it comes to ping pong, I have come to learn that I would rather lose a fun, long rally to my son then win a point which didn’t take a lot of effort. I am now actually happy when he beats me (we’ll see how I really feel if he beats me more regularly), proving that a parent really does want his kid to do better even if it means losing provided that the improvement was based on effort, focus, and commitment versus luck.

Over to You:

Do you believe in luck or improvement based on effort and focus?