Corporate investment: do you play the loser's game?

• Author: Ellis, Charles D.

Corporate investments: do you play the loser's game?

Those who hire outside investment managers don't always understand what the loser's game is all about. It was identified by Simon Ramo of TRW fame. A tennis buff, he examined that sport and found there are two games of tennis. They look the same. Both use the same equipment, the same dress code, the same court, the same scorekeeping system. But, after that, they deviate radically. Those of you who watch hours of good tennis on television are watching a game called "winner's" tennis, in which the only way to score a point is to hit the ball just past your opponent's reach and just within the lines.

That's not the game I play. My game has double faults, net balls, out-of-bounds shots, and other blunders. It's a very different game. In the game that lendl and company are playing, you win points. In the game that I love so much, we don't win points--we lose points.

A winner's game is one where the outcome is determined by the behavior of the winner. A loser's game is one where the outcome is determined by the behavior of the loser. And investment management, which was, in the '40s and the '50s, still a winner's game in which the bold and active investor could surely come out ahead, has, I believe, switched to being a loser's game. Those who try too hard will lose.

How does one become a loser in investment management? First, ignore the cost of activity. Pay no attention to the reality that in order to break even as an active manager you must outperform the market averages--before transaction costs and other expenses--by about 20 percent.

Second, romanticise the way the world works. Do not be concerned that we spend $4 billion a year motivating some of our most brilliant, articulate, and well-prepared individuals to persuade investment managers to change their minds and do something different. If you haven't had the privilege of sitting before the onslaught of talent, persuasion, and perfection of indecision that we call Wall Street, you owe it to yourselves to sit where the investment managers sit and see if you can withstand the blandishments.

Third, seek the physical solution to the investment puzzle. Work harder, read more reports, go to more dinners, fly to more distant cities, get up earlier, make more telephone calls--trying physically to outproduce your competitors. This macho role is intriguing, but there are very few capable of outsmarting the whole crowd, so success is an unlikely...