The way to achieve great returns from investing is to keep things simple and avoid making mistakes. When was the last time you played noughts and crosses? Probably a while ago, because it can be pretty tedious once you get the hang of it. It's an easy game for one simple reason—you can't win unless your opponent makes a mistake. Assuming your opponent is not a two year old (and shame on you if he is), he will usually grasp that fundamental principle quite quickly.

Noughts and crosses is not about winning, then, but about avoiding losing. Make fewer errors than your opponent over fifty games, say, and you will win the series. Plenty of sports and card games are very similar—if you keep your errors under control, your competitors will eventually make enough mistakes of their own. Your job is to remain in the game.

So are there any similarities between this and sharemarket investing? According to a seminal 1975 article by Charles D. Ellis titled 'The Loser's Game'*, the answer is yes. Ellis contended that investing is a 'loser's game', where the final outcome is determined more by the errors than by the successes. He did this using a tennis analogy, explaining that while professional players win about 80% of their points through superior skill, amateur players lose about 80% of theirs through unforced errors. Amateur tennis is a loser's game because, in essence, the person who makes the fewest errors wins.

And, according to Ellis, investing isn't much different. Before we examine the whys and wherefores, let's see just who the poor performers in the sharemarket are. All the evidence is that fund managers, on average, consistently underperform the sharemarket indices by about 1–3% a year. It may not sound like much, but when you consider the expected total return from the sharemarket in the future might be 8–10% a year, or less, you can see how it might make a big difference to your long-term performance. And this underperformance comes in spite of some very bright people in the funds management industry. Intelligence, it seems, is no guarantee of satisfactory sharemarket results. But before you get too smug, consider this. Research has shown that small investors, on average, perform even worse than fund managers. As Professor Julius Sumner-Miller used to say: Why is it so?

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