John Bogle, the father of passive investing, has this very simple piece of advice for anyone seeking to make their money grow.
Don’t try so hard. When you make investing into work, inevitably you run the risk being wrong and losing big money.
In fact, he uses the same words as Charley Ellis, a member of the Investment Committee of my firm, Rebalance. Avoid playing the “loser’s game” of market timing, Bogle says.
“Short-term market timing is a loser’s game. None of us know what tomorrow holds, not Bogle nor anybody else. And that’s why I have never done anything other than a 10-year reasonable-expectations perspective,” he told MarketWatch in an interview.
“Any day, any week, any month, any year can do what it wishes, but 10 years it comes down to how corporations do, and that’s more important than how the stock market does.”
Ellis, of course, once sat the on board of the company Bogle founded, Vanguard Group. Ellis also chaired the Yale University endowment and wrote a book, an investment industry classic, Winning the Loser’s Game.
That book grew out of the frustration Ellis felt, back in the mid-1970s, in explaining why most ordinary investors had trouble beating the overall market.
It seemed possible at the time. The industry was littered with famous names who had shown a tremendous prowess at zigging when the rest of the market zagged.
But the fact of the matter is that it’s very, very hard to beat the market. Ellis understood this innately and explained it in a single article in the respected Financial Analysts Journal.
He used a tennis metaphor to explain the problem. Put simply, professional tennis players are able to win points. Amateurs are much less likely to win points and in fact often lose points.
How? By trying so hard to win. The fact is, errors cost you a lot. Striving to set up the perfect backhand that drops the ball just past your opponent’s reach but inside the foul line is very hard. Pulling off that move repeatedly is extremely hard.
Even then, big-league investing already had turned into a loser’s game. Professionals had squeezed out any possibility that amateurs could hope for an advantage.
Win the game
Naturally, in our age of Internet, high-speed trading and information ubiquity, the “loser’s game effect” has only intensified. The number of verifiable winners in the investing world is very small indeed.
You might conclude that the best way to play is to not invest at all. But it turns out that investing is the only game in town. Inflation is forever, gnawing away at purchasing power. So we have to invest, without a doubt.
Winning the loser’s game is about being consistent, avoiding mistakes and lowering the cost of investing, all lessons Bogle taught at Vanguard and Ellis absorbed in his years of running the Yale endowment.
Retirement investors can win by using index funds to build diversified, risk-adjusted portfolios and by rebalancing with discipline. No market timing and no guessing. Do less, make the least number of mistakes and let your money compound along with the market.
That’s how you win the loser’s game.