Fewer Losers, or More Winners?

Written by Tom Stanley, Investment Adviser, September 2023

When I joined Amicus in late 2021, I started sharing some thoughts with clients through these monthly memos – the inspiration for this approach was a man called Howard Marks and his book ‘The Most Important Thing’.
23 notes later, I am still going and now more than 3,000 people receive and read these notes each month – this month I am leaning into my memo writing idol and connecting you with his latest musings.  
Howard Marks, the chairman and cofounder of Oaktree Capital Management, is renowned for his insightful assessments of market opportunity and risk. After four decades ascending to the top of the investment management profession, Marks is now considered one of the world’s leading value investors, and his regular client memos brim with insightful commentary and a time-tested, fundamental philosophy.
Also, he loves a good analogy – An approach I have tried to emulate, as I believe real world comparisons can cut through the jargon and complexities so often encountered in the investment world.
Below is Marks’ latest memo that plays on the recent US Tennis Open and how parallels can be drawn between the best tennis players strategies, and investment strategies, while offering a nuanced view on winners and losers.
The key takeaway is if you avoid taking risks i.e. hold only cash when investing, or play pure defence in tennis, it may not feel like you’re losing, but you will definitely not win in the long run – Marks advocates for a balanced approach of thoughtful risk taking – read on for more.

Click here to read Marks’ latest memo
Or Listen here

For those who prefer a short form written summary, here you go (thanks to ChatGPT):

  • Philosophical Foundation: Marks shares the story of a dinner with David VanBenschoten of General Mills Pension Fund in 1990, who emphasized the importance of consistency – “Dave told me that, in his 14 years in the job, the fund’s equity return had never ranked above the 27th percentile of the pension fund universe or below the 47th percentile. And where did those solidly second-quartile annual returns place the fund for the 14 years overall? Fourth percentile!”
  • Consistency Over Rankings: Marks believes that aiming for top-decile performance every year is unlikely to succeed. Instead, he advocates striving for consistent, above-average performance while having superior relative results during market downturns.
  • Risk Control Over Risk Avoidance: Marks distinguishes between risk control and risk avoidance. He argues that risk avoidance often leads to return avoidance and that investors (and tennis players) should aim for thoughtful risk taking, which involves understanding, analyzing, diversifying, and being well-rewarded for the risks taken.
  • Importance of Winners and Losers: Marks emphasizes that not having any losers is not a useful goal, as it usually involves avoiding risk altogether. In investing, as in tennis, taking some risk is necessary to achieve success. Marks dives into the tactics and of statistics of tennis players Djokovic, Eubank and Alcaraz’s outlining how their approach to winners and losers differs – You can win by having a few winners but fewer losers (Djokovic) or by having a lot of losers but more winners (Eubank). Neither maximizing winners nor minimizing losers is necessarily enough. It’s all in the balance.
  • The Risk-Return Relationship: Marks challenges the traditional linear depiction of the risk-return relationship. He introduces a more nuanced perspective where riskier investments introduce the potential for higher returns, but also the possibility of worse outcomes.
  • Market Efficiency and Skill: While the Efficient Market Hypothesis (EMH) suggests that markets are efficient and that investors can’t consistently beat the market, Marks believes there are times when markets are mispriced, and individual skill (alpha) can be applied to improve risk-adjusted returns.
  • Choosing Between Fewer Losers and More Winners: Marks concludes that the choice between emphasizing fewer losers or more winners depends on each investor’s unique skill, return aspirations, and risk tolerance.

At the end of the memo, Marks shares several sketches that I believe are useful in thinking about risk and return:

The traditional way risk and return are considered – higher risk = higher return…

But does more risk always mean more return? Marks does not think so and outlined a way to enhance this view in his note titled Risk (2006) – more risk may mean more return, but it also may mean a wider range of outcomes i.e. potential for much greater gain AND much greater loss.

Since writing that memo, Marks has concluded that this way of thinking about things has a great many applications. Here are a few:

There are also applications for this way of seeing things outside the investment world. For example:

And that brings us back to the subject of this memo:

I hope you find Marks’ latest memo insightful, and maybe I have pointed you to a new authority (or at least a new podcast to tune into regularly).
My experience is that Howard Marks identifies practical ways to discuss useful and interesting concepts and this application has helped me consider the risks I take in life and investing – I hope it is useful for you too.  
If at any stage you wish to discuss your investments, and/or the risks you are taking, please know that we are here to help – feel free to book a time for a call with one of our advisers below.

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