Keeping the Ball in Play
By
Thursday, July 31, 2014
It is one of our favourite times of the year. The sun is shining, the days are long, and the Odlum Brown VanOpen tennis tournament is in full swing!
As we sit courtside, watching tomorrow’s top stars compete, we can’t help but think about an interesting book on tennis strategy by Dr. Simon Ramo titled, Extraordinary Tennis for the Ordinary Tennis Player. He observed that tennis is really two games under one name: professional and amateur. Professional tennis is a “winner’s game” where the ultimate outcome is determined by the player who wins points by hitting fast and well-placed shots that are difficult to return. On the other hand, amateur tennis is a “loser’s game,” with the match going to the player who makes the fewest errors. In fact, Dr. Ramo found that in expert tennis, roughly 80% of the points are won whereas in amateur tennis, roughly 80% of the points are lost. While it is more fun to try to win points by making great shots, Dr. Ramo concluded that the best way for amateurs to win a tennis match is to avoid mistakes by being conservative and keeping the ball in play.
The tennis analogy plays well to our views at Odlum Brown, as we firmly believe that playing a smart and defensive game is critical to investment success. Contrary to Dr. Ramo’s findings in tennis, we think both amateur and professional investors are served well by avoiding mistakes. The best way to reduce mistakes is to avoid situations that cause permanent impairment of capital, such as paying too much for a stock, investing in overleveraged businesses, or owning companies that operate in industries that are prone to disruptive innovations.
Owning higher-risk investments might be as fun and exciting as making brilliant tennis shots, but defensive investing that avoids unnecessary risk usually wins the long-term investment game. By focusing less on aces and more on keeping the ball in play, investors will be wealthier and happier in the long-run.