Like pickleball, investing is a game of errors

I have always said pickleball is a stupid game. Tongue in cheek, it's actually a very fun game and extremely addictive and popular. I used the "stupid" moniker because it uses a silly little ball resembling a whiffle ball and little plastic paddles which look like the paddles teachers used to spank us with way back when. And yes, they really did that. We all learned to respect authority because of it. That's a meme I saw on Facebook and not the subject of today's musing of course, but I kind of had to throw that in there. Anyway, I have always said pickleball is a game of errors. The player(s) that make the fewest errors wins. That's not just my opinion. It's the way the game should be played. Ask anyone that's any good at it. Investing is like that. But unlike the common knowledge of how pickleball is won, few investors realize errors in investing are more important than the winners. A famous hedge fund manager once said, "It's not how much money you make in the rallies, it's how much money you lose during the down drafts." What is meant here is that losses are more important than gains. Or should I say, limiting losses is more important than tracking gains. Investing icon and billionaire Warren Buffett once quipped his two rules to guide your investing: Rule 1: Don't lose money. Rule 2: Don't forget rule 1. I fully believe and run my portfolios almost solely based on these rules. From my experience, however, investors celebrate their gains a lot more than concern themselves with limiting their losses. An advisor I know foresaw the housing blow-up of 2008-09 before it happened and sold almost all the stocks in his managed portfolios. He did the same before the Covid shutdown stock crash. The 2008-09 crash was prolonged and wiped out more than half of the Dow. The losses were so great many an investor suffered massive losses and subsequently many lost their retirement savings. Many an advisor witnessed distraught investors literally breaking down into tears in their offices around the globe. Some investors were so distraught they never got back into the market. Yes, some investors are like that. The 2020 March Covid crash wiped out about 38 percent in as little as four weeks. Investors again were more than stunned at the ferocity and velocity of the wipeout. But investors' memories are short-lived. Although the advisor literally saved his clients the horrible anguish that were these two events, the advisor continued to live by rule 1, don't lose money. This meant during the subsequent recovery, he was still careful. I was told he initially made a lot of money during the recoveries. But he always kept rule 1 in mind and therefore continued selling every time the market showed signs of weakness. This resulted in the portfolios failing to keep up with the indexes during subsequent recoveries. His clients soon forgot the miracle of how the advisor literally saved their bacon during the past carnage and the mental anguish most others had to suffer through. The advisor continued living by rule 1. But the portfolios languished when compared to the indexes. What happened next was his clients once again ignored rule 1 and began complaining they weren't making enough. Some left for greener pastures. Like pickleball, the advisor had made the fewest errors and won the "game" in 2008 and 2020. He paid attention to rule 1 in spades, and knew limiting losses IS the game – in pickleball and investing. But his clients went back to trying to hit winners. And like in pickleball, winners feel good and appear to be the way to play. But as anyone who plays pickleball long enough knows, you only get to the top of the game by making the fewest errors. It's why the icons of investing and professional traders alike know rule 1 rules. And in investing, that means putting the importance of limiting losses AHEAD of hitting winners. Do that in pickleball and with your investments, and eventually to the top of the ladder you will go. This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a BA in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. insurance services. Email: news@moneymanagementradio.com