Interesting Investment Philosophy Article...

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WINNING THE LOSER'S GAME
by Dan Ferris

My stepdaughter Rachel is 11 years old.

I've been watching her play softball every summer since she was eight. Each
game is both tragic and comic...

When the ball is hit in the air, you can bet it'll hit the ground, occasionally
taking a split-second detour into some hopeful little girl's glove. When the
ball is hit on the ground, it is generally hit with pinpoint accuracy, as it
nearly always goes right through the legs of the fielder closest to it.

Runs are scored in Rachel's softball games when somebody drops the ball. There
are no homeruns hit over the fence. Many runs are the result of four walks in a
row. There are few successful defensive plays of any kind. Balls are thrown but
rarely caught. Bases are stolen routinely because the girls are trained to hold
onto the ball lest they throw it away, allowing a second base to be stolen.

Rachel's games are nothing like major league baseball games. In the major
leagues, home runs are hit out of the park and double plays are thrown in most
games. Strikeouts don't happen because the batting is bad, but because the
pitching is so amazingly good. It's just like in the Ellis book, Winning the
Loser's Game. The little leaguers don't get beat by the competition; they beat
themselves by making errors. The professional ballplayers don't beat
themselves; they are simply outperformed by the competition.

Ellis reports on Dr. Simon Ramo. In his book, Extraordinary Tennis for the
Ordinary Tennis Player, Ramo found that, "professional tennis is a winner's
game: The outcome is determined by the actions of the winner. Amateur tennis is
a loser's game: the outcome is determined by the actions of the loser, who
defeats himself." War is another loser's game. According to historian Admiral
Samuel Eliot Morison, "the side that makes the fewest strategic errors wins the
war." Tommy Armour's book, How to Play Your Best Golf All the Time, says, "the
best way to win is by making fewer bad shots."

Investing is a loser's game. And it never becomes a winner's game. It's like my
stepdaughter's softball league. All you have to do is not make huge mistakes.
You never focus on beating a competitor. The greatest investors do not pull
financial rabbits out of their hats or solve difficult scientific problems.
They mostly just play it safe and avoid big errors. Warren Buffett's quote on
this matter can't be repeated often enough:

Rule No. 1: Never lose money.
Rule No. 2: Never forget rule No. 1.

I'm beginning to believe that investing is mostly about ruthlessly following
basic precepts like, "Never lose money." You never really graduate to the
advanced class, because there isn't one. You simply realize that it's all about
the basics, and then you stop losing money... and start getting rich. Like most
of the traits that make a successful investor, this one goes against human
nature. We humans love to complicate things. But with investing, the simple
answer is the one towards which you should gravitate. As Ben Graham writes on
page 147 of The Intelligent Investor, "security analysts today find themselves
compelled to become most mathematical and 'scientific' in the very situations
which lend themselves least auspiciously to exact treatment."

Not only do we humans want to complicate things. We also have a bias toward
action. This is simply the tendency to want to "do something" and not remain
passive. It's even worse that this bias serves you well in virtually any other
business but investing. Tom Peters listed "a bias toward action" as the number
one trait of effective managers in his classic work, In Search of Excellence.

Warren Buffett once said something like, "Lethargy bordering on sloth strikes
us as intelligent behavior." If I were to recommend more than five or six
stocks a year in these pages, maybe you should question the quality of those
ideas.

Unlikely as it may sound, I think that if you do nothing but decide right here
and now that you'll make fewer investment decisions and avoid bad ideas, your
performance will improve dramatically. This is something you hardly ever read
about in newsletters, because newsletter editors have a bias toward feeding the
typical reader's desire for new stock picks. Editors aren't bad people. It's
just that most readers think they're paying for the production of a certain
number of ideas. Most editors lose subscribers if they don't recommend a brand
new stock every month.

How many stocks should you own at one time? Any amount you want, as long as
it's not too many.

In October 1994, Warren Buffett addressed a room full of graduate students at
Kenan Flagler business school in North Carolina. He told them, "I made a study
back when I ran a partnership of all our larger investments versus all our
smaller investments. The larger investments always did better than the smaller
investments. There's a threshold of examination and criticism and knowledge
that has to be overcome or reached in making a big decision. You can get sloppy
about small decisions. You've all heard about somebody who says, 'I bought 100
shares of this or that because I heard about it at a party the other night.'
There is that tendency with small decisions to think you can do it for not very
good reasons. I think larger decisions are helpful in that regard." During the
same talk, Buffett said, "If you have 10 great ideas in your life, you can
afford to give away 5 of them, because that's all you'll need."

If you simply decide to make fewer investment decisions, you'll naturally take
greater pains to make better decisions. Says Buffett, "Your default position
should always be short-term instruments. And whenever you see anything
intelligent to do, you should do it." Buffett also said that asset allocation,
a Wall Street obsession, is pure nonsense. Asset allocation is Wall Street B.S.
for when Abby Jo Cohen announces, in a very pompous way, that now she's going
to recommend that you put 65% of your money in stocks, and 35% in bonds, when
before it was 60% in stocks and 40% in bonds. People actually pay a lot of
money for that kind of advice. Educated people. People who would otherwise
impress us with their connections and money and power.

Jim Rogers is somebody else you ought to listen to on the subject of managing
your own money. He used to work with the famous billionaire trader George
Soros. Rogers drove around the world twice, once on a motorcycle and once in a
car, and wrote a book about global investing after each trip. Rogers told
author John Train in 1989 that you should, "take your money, put it in Treasury
bills or a money-market fund. Just sit back, go to the beach, go to the movies,
play checkers, do whatever you want to. Then something will come along where
you know it's right. Take all your money out of the money-market fund, put it
in whatever it happens to be, and stay with it for three or four or five or ten
years, whatever it is. You'll know when to sell again, because you'll know more
about it than anybody else. Take your money out, put it back in the
money-market fund, and wait for the next thing to come along. When it does,
you'll make a whole lot of money."

Of course, a tangible margin of safety isn't always necessary, but it's hard to
argue with. Making a mistake doesn't mean the principles are wrong. It means I
need to work harder to get them right. I'd encourage you to do the same.

Regards,

Dan Ferris
for The Daily Reckoning

[gmarc66]

fill_the_gap...Wow....i liked that.

Hmmmm....welll....what to do, what to do...what to do now? hmmmm..

That was a very clear yet thought provoking read...logical, keep it simple and clear, no nonsense, stick with the basics kind of plan. So, i guess now we know what made u decide to stick to just a few choice stocks...and thats your plan. Sounds good to me.

Good luck to you...you look like u have some sure winners there!

julia

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I am transferring the same plan to the Pennies that has worked with the big boards.
Tried multiple strategies with the pennies.  Back to the basics.

-  Know the company to the best of your ability. 
-  Focus on a few with a real product. 
-  Then get comfortable with the charts, trends and patterns.  Learned alot with GZFX.  Now making money on it. 
-  Always making sure I do not have too many.

Working so far.  We will see.  So many different ways to trade out there.

-Jeff-