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Why investing is like tennis

Don’t always expect to hit the big winners.

CAPE TOWN – For many people, investing is intimidating. It seems technical and opaque and difficult to understand.

Unfortunately, this puts many people off. They are so afraid of making mistakes that they rather do nothing at all.

It shouldn’t, however, be this way. Yes, investing can be complicated and it can be technical, but only if you want it to be. For the man-on-the-street it can also be extremely simple.

This is what many people and organisations within the index tracking industry are trying to achieve. By giving people direct exposure to a market or asset class, they are trying to take investing out of the realm of the mysterious and bring it down to earth.

Tracking an index doesn’t require you to understand the jargon of price-to-earnings ratios, or dividend streams or yield curves. It doesn’t even need you to know the difference between investing styles or market cycles.

It only requires you to have a very basic understanding of the difference between equities, bonds, property and cash. Because what indexing gives you is the ability to pick an entire asset class without having to worry about the intricacies of the underlying bits and pieces.

This is part of the reason why it is becoming so popular. It takes the mystery out of investing by not relying on fund managers to choose where and how to deploy your capital. You are handing it over to the market, which ultimately is the sum result of all the asset managers out there.

Anthony Ginsberg, the MD of index fund provider Ginsglobal, says that he was a convert to indexing having come from ‘the other side of the fence’. Having worked in active management, he understood not only how difficult it was for a fund manager to consistently out-perform, but that often they created unnecessary complexity by trying to do so.

“When I was growing up, I thought you had to be a real clever guy to invest,” Ginsberg says. “But actually investing is not rocket science.”

He says that for most investors, keeping it as simple as possible is really the winning strategy. To make his point, he likes to use the tennis analogy made famous by Charlie Ellis, author of The Loser’s Game.

“When you watch Wimbledon, the top pros are hitting the winners,” says Ginsberg. “But at club level, the guy who wins is usually the one who makes the least mistakes. Investing is largely that story.”

Just keeping the ball in play will, over the long term, deliver results that few active managers are able to beat.

“Index trackers are not sexy,” says Ginsberg. “We are just hitting the ball back into the middle of the court. There will be managers who out-perform, who hit the winners, but indexing is really about not messing up, about being consistent.”

He says that the passive industry in the US in particular has probably benefited from the way markets have performed over the last decade and a half. The trend has been sharply upwards, but it has been interrupted by two big dips.

The different stages of the cycle have rewarded investing styles very differently. The result has been that star managers have emerged as their approach hit a sweet spot, but when things changed they have often fallen from grace quite spectacularly.

The most obvious local example is the deep value managers who were shooting the lights out heading into the financial crisis. Over the last few years, however, their style has found no purchase.

This kind of inconsistency can be understood and even tolerated by more sophisticated investors, but it’s very difficult for the average person to come to terms with. And because it has happened on such an extreme scale in recent years, it has left many people disillusioned.

“I think lots of people threw their hands up and lost faith in the stock market,” Ginsberg says. “And I think many people suspected that they had been bamboozled by value investing versus growth investing, or four factor models or whatever active strategy was being pursued.”

Passive strategies however makes the decision much easier. Investors don’t have to worry about what strategy their manager is following and whether it will work in the current conditions. They only have to understand that they will get whatever the market is offering.

This makes it, in a sense, the ‘people’s choice’ – the best way to ensure that you are always in the game. You may not be hitting lots of winners, but you’re cutting out your chance of making mistakes.

“Our mission is to democratise investing,” Ginsberg says, “and indexing is about the simplest you can make it.”

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