Waves of water

Dare to be average

Matt Damon says at the end of Rounders, “You can’t lose what you don’t put in the middle. But you can’t win much either…” I’d add: if you play long enough, the house always wins.*

If there are 10 people at a poker table and they play long enough, only the most skilled 1-2 players will win. The best players win money from the rest. And the house takes a cut of each hand that’s played. In fact, if the house’s cut is big enough, none of the players – not even the best players – will finish “ahead.”

I think this describes investing. To outperform, you need to be in the top 10-20% of the players in the game. And it isn’t enough to be smart or insightful. You need to be smartER, MORE insightful, hardER working, etc. than the competition (as Michael Mauboussin explains in The Paradox of Skill). And you also need to focus on the house’s “take” (the direct and indirect costs of your investment program).

Outperformance is hard. You have to be different, right, and execute well. And, on top of that, you have to add enough value to offset the very real costs of your investment program.

Most people think they are above average drivers, funnier, etc. But that can’t be true. Some of us have to be average or below average. So, the mistake we make is sitting down at the table (over)confidently thinking we are one of the top 1-2 players when we are not. The skilled players and the “house” never want us to stop playing – that’s more money for them. So, they’ll fawn over our “brilliant” choices, give us “special” access, whatever it takes to keep us playing.

 Only foolish investors pursue casual attempts to beat the market, as such casual attempts provide the fodder for the skilled investors’ market-beating result.
– David Swensen

What is a casual attempt? Selecting individual stocks (unless that’s your full-time job), buying or selling funds based on recent performance, trying to time the market, making predictions about the future, or investing based on something everyone knows.

Most of us are casual players. So, I say Dare to be Average. The irony, however, is that the amateur individual investor who owns the market will outperform 80% of professional investors over 20 years. So, by daring to be average you’ll end up a top quartile investor.

The greatest advantage from gambling comes from not playing it at all.
– Girolamo Cardano, 16th century physician and mathematician


 *true poker aficionados will know this isn’t strictly true but close enough.

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