You Need a New Rulebook to Do Well in this Market

The world of investing is full of very interesting perspectives offered by some very smart people.

One of my favourites is the one by Charles Ellis.

Rightly called as an investment legend, Ellis is of the view that the investing game has changed from a winner's game to a loser's game.

You see, back in the 1950s, most investors in the US were individual investors. They were willing to put in the time and effort to study stocks and thus, earn market beating returns.

However, professional investors now make up 90% of the market who come equipped with a very high skill set.

Thus, earning market beating returns has become that much more difficult. The person on the other side of the trade is likely to have as much knowledge as you or may be even better.

This is how Ellis put it in a recent interview.

• When investors trade stocks, mutual funds, or ETFs, they are almost surely trading with other professionals who spend 60-80 hours a week doing something that they may do only once a month. These investors are too good at investing and there are too many of them for any of them to win. Hence the investing game has changed from a winner's game to a loser's game.

Think of it as a game of tennis. There are two ways of defeating your opponent. Either you play better than your opponent or you commit fewer errors.

As per Ellis, winning the game of investing is all about committing fewer errors now.

Since the players are so evenly balanced, it's very difficult to outperform by putting in a superior performance. You have a much better chance of winning if you keep the ball in play and wait for your opponent to commit an error.

If you are still finding it hard to believe that consistent outperformance is becoming a thing of the past, take a look these numbers from a recent piece on Moneycontrol.com.

Almost 90% of large cap funds in the country have underperformed the benchmark index over the last 1-year, 3-year, and even 5-year periods.

By keeping your costs low and by sticking with index funds, you would have outperformed 90% of largecap fund managers.

The new rules of the game of trying to keep your errors to a bare minimum would have served you pretty well.

Trust me, with more smart people joining the industry and with more efficient machines to crunch data, consistent outperformance is only going to get tougher.

Does this mean you should stop harbouring hopes of earning those 20%-25% returns over the long term and be happy with 14%-15%?

Well, not so fast. In order to achieve this, you will have to do things that are unpopular and yet correct.

Things like staying in cash back in February, March 2020 and then taking a big exposure to stocks as the markets crashed.

Both these actions weren't very popular back then.

The markets were creating new highs on a regular basis in early 2020. It was considered a big mistake to stay out of stocks back then.

Likewise, it was considered dangerous to go back into stocks back in March 2020 post the Coronavirus crash.

Both these actions were not popular and yet they were the right thing to do from a long-term perspective.

Why? Simply because markets were expensive back in early 2020 and so it made sense to have a large cash exposure. Also, they turned cheap after the crash and so it made sense to get back into stocks.

My systems based approach to investing is built on exactly such principles. It tries to do unpopular things but only the ones that make sense from a long-term perspective.

Of course, it carries with it the risk of underperformance, but it can reward you handsomely.

What I like the most about this approach is that it won't hurt your portfolio in a big way if things are not going in your favour.

And that's as close you can get to having a perfect strategy in the stock market.

So, you're either playing a loser's game or you're doing things that are unpopular and yet logically correct from a long term perspective.

The choice is yours.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter