Winning the Loser’s Game is written by an American investment consultant. For my full review, you may refer to the review that I wrote on 2bookspermonth.com (Link).
Lessons from Winning the Loser’s Game
What is a loser’s game? The difference between a winner’s game and a loser’s game is the factor determining the outcome. In a winner’s game, the outcome is determined by the correct actions of the winner. In a loser’s game, it is determined by the mistakes made by the loser. The author thinks that active investing is a loser’s game. The only way for active management to beat the market, after adjusting for market risk, is to discover and exploit other active investors’ mistakes.
The past is not prologue in investment performance except for the grim finding that those who have repetitively done badly are likely to stay in their slough of despair. The key to investment success is not found in the last few years’ performance numbers. It is in the long-term performance culture of the organization.
Markets always have been and always will seem surprising because every market is different in its details but their major characteristics are remarkably similar. Market history will repeat as it is hard for people as a group to learn or change. Thus, knowing history and understanding its lessons can insulate us from being surprised.
The pathway to successful investing is soundly conceived, persistently followed long-term investment policies. It depends on having clearly defined objectives and the right asset mix and staying with the program.
Spending decisions should not influence investment decisions, it should be the other way around. Investment results should govern spending decisions as the market does not give a damn what you want to spend.
The most important dimension of an investment policy is the asset mix, particularly the ratio of fixed-income investments to equity investments. The author shows that the average real rate of return after adjusting for inflation for the following instruments are 4.5% for stocks, 1.5% for bonds, and 1.25% for T-bills. The average price/earnings ratio in recent decades for the US stock market is about 15.5.
Two main areas to evaluate common stocks are consensus of investors on the probable amount and timing of future earnings and dividends, and the consensus of investors on the discount rate at which this stream of estimated future dividends and earnings should be capitalised to establish its present value. The consensus that matters for long-term investors is not today’s consensus but the consensus that will prevail when we actually get to that distant future. The importance of the discount factor decreases while the importance of corporate earnings and paid dividends increases.
The great risk to individual investors is not that the market can and will plummet but that investors will get frightened into liquidating their investment at or near the bottom and will miss all the recovery, turning temporary market loss into a permanent capital loss.
The hardest part of investing for most investors is not figuring out the optimal investment policy but staying committed to sound investment policy through bull and bear markets and maintaining constancy to purpose.
Conclusion
The indexing that the author recommends is quite hard to achieve in Malaysia. Though it is hard, it is not unachievable. There are some local brokerages that offer the service to trade US index exchange traded funds. However, this trading will involve brokerage fee. I personally use Firstrade to avoid brokerage fee but it has its own drawbacks too. For Malaysia market, as it is not as efficient as US, I think there is still some chance for investors to construct portfolios to beat KLCI. Nevertheless, indexing would save a lot of trouble and we will get close to market return. Thus, it is all up to you.
Recommended book
If you are interested in Winning the Loser’s Game, you may get the book through the link below*.
Get the book here from Kinokuniya Malaysia
*Disclosure: The link above is an affiliate link. If you buy the book using this link, I might get a small commission from your purchase.
