Tennis – Hit Winners Or Avoid Losers

Posted: November 3, 2023

Two tennis players on a tennis court

I recently read Howard Marks’ latest memo, “Fewer Losers or More Winners?” and it reinforced in me that this guy is a true trend follower in his own way (even if he doesn’t realize it yet). Marks is widely regarded as one of the most insightful and influential investors in the world, and his memos are read by thousands of professionals and enthusiasts alike. For those who think reading a long-form memo is like hopelessly digging in a sandbox looking for treasure, fear not, I found the treasure for you.

The Yin & Yang of Investing

In his memo, Marks discusses the trade-off between aggressiveness and defensiveness in investing and sports, using tennis as an analogy.

He argues that there are two ways to win a tennis match: by hitting more winners (aggressive shots that the opponent cannot return) or by making fewer unforced errors (defensive shots that keep the ball in play). In fact, research by Simon Ramo shows that professional tennis players win about 80% of their points by hitting winners, while amateur players lose about 80% of their points by making unforced errors. Thus, for professionals, the key to success is to be more aggressive, while for amateurs, the key to success is to be more defensive.

Marks applies this logic to investing and suggests two types of investors: 

  1. Those who can hit more winners (outperform the market by taking calculated risks) 
  2. Those who can avoid more losers (preserve capital by avoiding mistakes)

He acknowledges that both approaches can work, but they require different skills, temperaments, and environments. He also warns that investors should not confuse luck with skill or assume that they can switch between the two styles easily.

Additionally, the memo states Mark’s preference for avoiding losers over hitting winners. He explains that this is consistent with his investment philosophy, which emphasizes risk control and consistency above all. He believes that avoiding disasters is the best foundation for above-average long-term performance, especially in uncertain and volatile markets. My impression is that he also implies that this approach is more suitable for most investors, who are not as skilled or experienced as professionals.

Trend Following is About Avoiding Losers

As a Partner at Blueprint Investment Partners, I find Mark’s memo very insightful and relevant for trend followers. Trend followers do not try to hit winners by picking tops or bottoms, but rather try to avoid losers by cutting losses short and letting profits run. Trend followers also aim for consistency and risk-adjusted returns over time, rather than chasing short-term gains or beating benchmarks.

However, this does not mean that trend followers are passive or timid. They still must be proactive and decisive in identifying and following trends, as well as in managing their positions and portfolios. And they must be flexible and adaptable to changing market conditions, as well as resilient and confident in their strategy. Trend followers must balance between being too aggressive (taking too much risk or chasing false signals) and being too defensive (missing opportunities or exiting too early). Most importantly for Blueprint Investment Partners, we have a predetermined plan for action based upon the asset price signals, and we stick to that plan without hesitation.

The power of trend following is that it should enable the compounding of value from ever-higher levels by avoiding the washouts. Marks shares the example of his friend who was head of a pension fund with performance that in any year never got above the 27th percentile versus its peers, but also never fell below the 47th. Yet, the compounded performance over 14 years put the fund in the 4th percentile. Think about that, for a minute.

I think that trend followers can learn a lot from Marks’ memo. They can use it as a reminder of why they chose this strategy in the first place, and the benefits of following it.

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