Some anecdotes from Howard Marks’ memo Fewer Losers or More Winners
If we avoid the losers, the winners will take care of themselves.
bond investors improve their performance not through what they buy, but through what they exclude – not by finding winners, but by avoiding losers.
risk avoidance is likely to result in return avoidance. There’s such a thing as the risk of taking too little risk. Most people understand this intellectually, but human nature makes it hard for many to accept the idea that the willingness to live with some losses is an essential ingredient in investment success.
amateur tennis is a loser’s game: The winner is usually the person who hits the fewest losers. If you can just keep the ball in play long enough, eventually your opponent will hit it off the court or into the net
You can win by having a few winners but fewer losers or by having a lot of losers but more winners. Neither maximizing winners nor minimizing losers is necessarily enough. It’s all in the balance.
In favor of index investing:
-The performance of the equity indices is often dominated by a few stocks or groups of stocks.
-The gains of the leaders can make them seem expensive, arguing for profit-taking.
-Human nature – especially the desire to avoid regret – adds to the motivation to sell.
-By definition, if you reduce your holdings of the winners relative to their representation in the indices and these winners continue to outperform, you’ll have a tough time keeping up.
“If you look at the chart of a stock that’s been up for 25 years and say, ‘Man, I wish I’d owned that stock,’ think about all the days you would have had to talk yourself out of selling.”
If alpha is the ability to earn return without taking fully commensurate risk, investors possessing it can do so by either reducing risk while giving up less return or by increasing potential return with a less-than-commensurate increase in risk.
Source: Fewer Losers, or More Winners?
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