Evidence Based Investing – Playing the Winning Game

During my youth I quickly learnt to get ahead you had to play the ‘Winners Game’. Do you remember school sports day in the days when competition was actually allowed?

I vividly remember being awarded a ‘Well Done’ sticker for coming 4th. Even at 6 years old I knew this well-meaning gesture said you are basically rubbish in the Athletics department! Sadly, experiences like this ingrain our innocent beliefs that to get ahead in life you have to play the ‘Winners Game’.

When it comes to investing nothing could be further from the truth. Especially, when the objective is to build a better future for you and your family. Playing the ‘Winners Game’ of chasing the next best investment or latest hot tip often becomes a costly participation in the ‘Losers Game’.

Surely the objective is to achieve the highest returns through research and investment selection? Let’s assume you have found a potential ‘winner’ that no one else has spotted and wish to buy it. To successfully complete the trade you need to find another participant who believes the opposite to you and wants to sell their investment. Only one of you can be right and does that mean they are smarter than the other or just lucky? The trade itself creates no new wealth; wealth is transferred from one investor to another whoever happens to be luckiest this time around.

Actually, true wealth is created in the long term when well-run companies put time, energy and finance into developing new ideas that make a difference to their customer’s lives. But how do you know which ones will be a success? You don’t nor can you consistently separate the winners from the losers. However, human beings are incredibly inventive and come up with great ideas that consumers are willing to pay good money for. That is what creates true wealth. If only you could capture that!

So I’ll just select a ‘Star’ fund manager do it for me? Sadly, the concept of a ‘Star’ fund manager is a bit of a myth. Whilst it may appear some managers can find extra value in the short term, the evidence shows very few survive in the top flight consistently over time. ‘Star’ fund managers also move jobs, retire or start their own thing. All too often their ‘Star ‘quality is not transferred to their new venture. If they did exist picking a ‘Star’ manager proves equally difficult.

Unfortunately, playing this ‘Winners Game’ incurs significant costs which damages our long-term wealth. Most investors do not realise the effect of the extra hidden of around 1% to 1.5% per annum. The ‘Winners Game’ also sucks us into an emotional roller-coaster of playing it. We convince ourselves that playing this game will come right in the end. Further bad decisions are made in an attempt to correct poor ones we have made along the way. The result is damaging to our long term prosperity and detrimental to building long term financial security.

So what is the solution? Warren Buffett recommended in his last newsletter that most investors would be better off investing their family wealth in a well-diversified portfolio of Indexing Funds and then holding them for the long term. We call this approach ‘Evidence Based Investing’. This provides a structured and disciplined approach to portfolio construction that focuses on capturing the whole market returns (wealth creation) and driving down costs. The effect of lower charges significantly improves individual’s outcome when the savings are compounded over many years. Because it is a disciplined approach it helps avoid the major pitfalls of emotional decisions that can be damaging to our future.

We call this approach ‘Evidence Based Investing’. This provides a structured and disciplined approach to portfolio construction that focuses on capturing the whole market returns (wealth creation) and driving down costs.

To read more about this approach more I would recommend the following book ‘Smarter Investing – Simpler decisions for better results’ by Tim Hale. Get advice from a well-qualified financial planner who have developed an Evidence Based Approach to investing.

At the end of the day it is very satisfying to say ‘Well Done’ you have achieved everything you wanted to do in life with the resources you had available. That’s what real financial planning should be about.


About the Author

Jon is a highly qualified and experienced Chartered Financial Planner and Certified Financial Planner with over 27 years’ experience. He loves working with clients who are passionate about getting the most out of life and feels his job is to support them living life to the fullest. Read more from Jonathan...
This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
This is my first venture into any kind of personal finance. Your candour and patience with me are very much appreciated. A.S. (London)

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