Charlie Ellis, the loser's game, and hedge fund management

 

Charlie Ellis, the great money management observer, often talked about the investment business as a loser's game. It is not what you do right, it is what you do wrong that matters. The core goal is to avoid mistakes that will separate you from the crowd of managers. The better professionals don't make forced mistakes. 

Ellis uses tennis as the metaphor of a loser's game. The amateurs make mistakes, and the better player just gets the ball over the net. Just get it over and the other player will knock the ball into the net or out of bounds. At the profession level there are no easily forced errors. You must show skill and use better strategy to win the game at the higher level. The easy mistakes are avoided.

The lesson to be learned simple. First do the simple things that will avoid simple investment errors. Manage risk. Do not trade outsized positions. Control the costs of execution. Find cheap hedges. Look for cheap alternatives to gain the desired exposure. If you want beta exposure, buy it cheaply. 

If you get the simple concepts of money management right, you will not make stupid mistakes which will cost you money. With the fundamentals covered and avoiding the loser's game, you can play at a higher level. Albeit simple, these foundational decisions make all the difference as you compound returns over time.