Thanks for opening this post.
You must be curious , what is an infinite game ?
In finite games, like football or chess, the players are known, the rules are fixed, and the endpoint is clear. The winners and losers are easily identified.
In infinite games, like business or politics or life itself, the players come and go, the rules are changeable, and there is no defined endpoint. There are no winners or losers in an infinite game; there is only ahead and behind.
We believe that investing is also an infinite game which allows an individual an unique opportunity to craft his/her journey to financial freedom along with providing the intellectual challenge which one might seek.
Let me tell you why it is an interesting game.
The Investing Game
Invested Capital : Finite
Unless you have inherited immense wealth or you have a business which generates infinite amount of cash to invest for a very long period, the capital which you would have would come only from your monthly savings from a day-to-day job.
But here is the top secret for making the savings rate inch up —> just write down all your monthly expenses , line by line for the last two/three months, down to the last rupee/ dollar.
Once you have made the above list , start looking at some of the expenses which can be avoided /mitigated - maybe the extra gadget which you never used or the unnecessary expense which can be avoided . Once you are aware of the things which can influence your savings rate , battle is half won already. But , don’t take the savings rate too much to heart - as they rightly say - too much of any thing is always a bad thing.
But the right amount of frugality will certainly help you in two ways a) accelerate accumulation of your investing snowball b) provide an insurance cover through adequate savings in case of sudden problems.
Here are a couple of stories to motivate you if you think saving is tough from your salary:
a) Ronald Read , a Vermont-based janitor and gas station attendant , left behind a $8 million portfolio donated mostly to local hospital and library when he died at the age of 92. His own family did not know the extent of his wealth.
Remarkable patience: Most of his holdings were for decades (talk of patience in today’s world where holding stocks for a day might be considered long term!)
Investing in Blue Chip stocks: He had investments in stocks like Procter & Gamble, JPMorgan Chase, General Electric, Johnson & Johnson, Dow Chemical etc.
Diversification: He owned nearly 95 stocks with the diversification helping mitigate impact of investments in bad stocks like Lehman Brothers ( Portfolio concentration is only recommended when you actually know and understand what you have invested in!)
b) Sylvia Bloom, a 96 year old frugal legal secretary who donated 8.2 Million $ just from the savings from her meagre secretarial salary.
As a secretary, she used to know about her boss's investments , and whenever the boss bought something, she would purchase the same stock, albeit in a smaller amount due to her own salary.
Returns from the Investing Game : Infinite
The possible returns from investing right and holding on to such investments over a really long period of time can be mind boggling.
Warren Buffett, the legendary investor has compounded capital as the rate of 20% + for over 54 years (v/s 10% for S&P 500 index) ! While sustaining over performance for a few years is manageable, beating the index for 54 years in no small feat.
Source: Berkshire letter to shareholders 2019
Warren Buffett’s style of value investing was written off multiple times during his investing career, and every time he has proved his nay-sayers wrong.
What’s his secret ?
Continuous learning and adapting to change.
In 2011, he took the world by surprise by investing in technology, one sector which he was historically averse to by investing 13 Bn $ in IBM starting from 2011.
But he was also astute enough to completely exit IBM and invest in Apple, which has been touted as one of his greatest investments recently. Warren Buffett's 2016'-2018’s investment in Apple- is now 40% of total Berkshire's equity portflio and his investment in Apple is nearly up 300% in 4 years to 100+ Billion$ .
So what’s the lesson from our teacher, the 90 year old Warren Buffett? Patient capital and investing in what one understands for a long time will lead to compounding effect on good investments and mind boggling returns as we have seen earlier.
Losses from the Investing Game : Semi-Finite
Whenever there is a talk about any gain in life / investing , one should always ask - What’s the risk ? What don’t I understand about this payoff?
Real Knowledge is to know the limit of one’s ignorance.
The possible losses from investing is finite when it comes to losing your hard earned money i.e. the principal amount. This can be amplified by taking risky bets using options , leveraging by debt for investing , investing in exotic asset classes without understanding them e.g. cryptocurrency etc.
While money lost can potentially be recovered , but it does have an adverse impact on the mental well being of an amateur investor. ( Recently , a 20 year old Robinhood investor committed suicide who misunderstood the inherent products /risks associated with options trading)
One can also look at Returns per unit of Stress (from the famed Professor Sanjay Bakshi, well known value investor in India)
Given the time effects of compounding, its critical to rectify any erroneous judgments as soon as possible - one wouldn’t want the mistakes to compound right?
The key secrets to minimize losses :
Invest in what you truly understand,
Diversify your portfolio,
Avoid concentration unless you know what you assets are buying &
Allow time for your investments to grow & compound.
Investing truly is a paradox ( Diversification v/s concentration ; volatility v/s risk etc) , but it is an interesting paradox( some thoughts written in an earlier post) which makes the game much more challenging .
Role of players ( You and Everyone else)
In every bull and bear market cycle, there is a new class of investors who learn the age old principles of investing.
..When a man with money meets a man with experience, the man with experience ends up with the money and the man with the money ends up with experience..
G.W Friedrich Hegel
We , as individual retail investors are uniquely positioned due to not be bound by shackles of institutional investors like sticking to asset classes, disclosure requirements , constraints due to capital deployed etc.
But, given the limited knowledge of retail investors, one needs to be careful and not join on the FOMO bandwagon.
Retail investors have lapped up the recent volatility in the markets -for example Robinhood (a popular discount broking platform in USA) added nearly 3 Million new customers in 2020 with nearly half of them first time investors. In India, a similar players - including Zerodha has reported 30% -40% increase in new account additions this year.
One recent example - in US, Hertz's stock price galloped nearly 900% driven by the frenzy of amateur investors despite filing for bankruptcy. There has been an equal frenzy in penny stocks in India which is bound to end badly for such investors.
Rules of the Investing Game (No rules!)
There are no defined rules for achieving investing success. There are multiple styles of investing - Cigar Butt, Value Investing , Momentum investing , Short Selling , Quant Trading and many many more.
On one end you have Warren Buffett’s of the world doing value investing for decades, on the other side you have Jim Simons of Renaissance Technologies generating 66% annually before fees from 1998 through quant investing.
Its important to understand one’s own temperament and aptitude when one is investing in a personal capacity /style. If one doesn’t have the time /effort to track and monitor investments , one can take help from financial advisors/mutual funds to help manage investments with a fee (1%-2%). Low cost options like index investing is also available for investors looking at market returns with very little cost (02.% - 0.5%).
And as they always say, keep learning and be patient, results will follow in due time.
Learn every day, especially from experiences of others. It's much cheaper.
- John Bogle
Winning in the Investing Game
So what does winning in investing mean?
Superlative returns ? Market beating performance ? Financial independence?
While financial returns are the byproduct of successful investing , the journey itself to financial independence can be enriching for the investor.
The stock market allows you to discover more about yourself - how you handle actual/notional losses, how you handle panic in the markets , how you handle successes, how much you actually understand the business you own.
We end this post with an apt quote from Warren Buffet’s foreword to Benjamin Graham’s Intelligent Investor Book:
To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline.
So dear Reader, how has your game been ? How have you been playing it?
Do let us know your feedback on this post , we would love to hear your thoughts.
NOTE: Please consult your financial advisor for advice before investing in any financial product. Please also note that I am not a registered investment advisor, these articles are for learning purpose only and should not be considered as investment advice.