Warren Buffett is widely regarded as the world’s greatest stock investor. He’s also a canny and memorable phrasemaker, whose words of wisdom are quoted wherever and whenever less talented investors gather to brag about their successes and dissemble about their failures. One of his most memorable observations was:
“Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.”
Stephanie Loiacono observed in Investopedia recently (August 17, 2017) that what Mr. Buffett was talking about is the necessary mentality of the acute investor. What he’s saying is:
‘Don’t be frivolous. Don’t gamble. Don’t go into an investment with a cavalier attitude that it’s OK to lose. Be informed. Do your homework. Buffett invests only in companies he thoroughly researches and understands. He doesn’t go into an investment prepared to lose, and neither should you.’
I agree with Ms. Loiacono’s interpretation. It’s how we work at the Ritcey team. Before going further I want to share with you some fascinating numbers. The numbers relate to tennis, but they are critically relevant to my point.
An instructive analogy
By almost universal consent among tennis aficionados, possibly the greatest match ever played in the history of the game was between Roger Federer and Rafael Nadal in 2008, at Wimbledon.
While Nadal prevailed after four hours and forty-eight minutes of electrifying tennis, one of the most fascinating features of the match is to be found in the underlying statistics. Take a look at these numbers:
Wimbledon Final 2008 Match Statistics
|1st Serve 100%||65%||73%|
|Winning % on 1st Serve||73%||69%|
|Winning % on 2nd Serve||57%||59%|
|Receiving Points Won||33%||33%|
|Break Point Conversions||1/13 (17%)||4/13 (30%)|
|Net Approaches Won||42/75 (56%)||22/31 (71%)|
|Total Points Won||204||209|
|Fastest Serve||129 mph||126 mph|
|Average 1st Serve Speed||117 mph||112 mph|
|Average 2nd Serve Speed||100 mph||93 mph|
Unforced errors and net approaches won
Federer hit more aces. He hit more winners. He served faster, on both first and second serves. Yet on two key metrics – unforced errors and net approaches won – he performed less well than Nadal. Unforced errors and aggressive moves to the net that didn’t pay off were the key to the match.
Nadal won by not losing. He went for broke less frequently. He bided his time. He played the percentages – far more consistently than Federer. That’s why he won, by not losing. There is a lesson here for all investors, especially in the environment we occupy right now. Consider these principles:
1. Know your limits of competency
Risk stems from not knowing what you are doing. Minimize your investment mistakes by understanding what you own and remaining within your area of competency.
2. Think for yourself
As another investment legend, Ben Graham, once observed: ‘The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.’
3. Invest in quality
Invest in businesses that are resilient. Look for those that sell everyday products and services. Especially, keep a lookout for companies that are likely to survive and prosper in negative environments.
4. Invest with a calculated margin of safety
To continue my tennis analogy, hit substantially above the net to give yourself a solid margin of safety. If you’re going to pick a target, make sure it’s inside the line, not on the line.
There’s a famous Peanuts cartoon, depicting a disputed tennis point, in which the protagonist (Charlie Brown) is protesting what he considers to be a bad line call. He says: ‘I hit the exact middle of the outer part of the edge of the front part of the back part of the line.’ That’s funny as a caption, but lousy as a judgment call the ‘winning by not losing’ investor should ever entertain.
Dave Ritcey, The Ritcey Team, Scotia Wealth Management