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Investing Success in Two Easy Lessons

If we are always looking for insights into investing's secrets, we will find them, even in unusual places. Here are two good lessons: one found while watching the Munich Marathon and one found in a Wall Street admonition by a dignified, successful senior.

Successful investing should be easy. Obviously, it's not. But in over 40 years, mostly in the privileged position as trusted advisor to the leaders of major investment and securities firms, two investment lessons stand out for me as particularly valuable and easy to use. Anyone who “gets it” on these two easy lessons will do well. Like career “bookends,” one came early and one late in over four decades of continuous learning about investing.

In Munich, while visiting my son Chad and his wife Trish a few months ago, we agreed to cheer for their friend who was running in the Munich marathon. That friend had run several marathons, so she had a realistic plan and knew that at about eleven, she would pass a particular church, so we were stationed there and, right on schedule, she came by. We cheered lustily, she waved and was quickly gone.

We went off to lunch at a Wursthaus and then took the tram out to Olympic Park. As we walked from the tram station to the stadium and the marathon's finish line, we passed a trio of cheerful Kenyans who had already completed the race—probably coming in 1st, 2nd, and 3rd—and were going home. It would be nearly an hour before our friend would finish.

The organizers of the Munich Marathon had arranged an attractive way to finish:

Runners would come into the stadium through a tunnel that was filled with vapor and then burst out into the sunlight as they entered the Olympic stadium with only one short lap around the stadium left to go. The runners, nicely encouraged, loved it.

Sitting in the stadium with a few hundred other fans, we enjoyed watching runners individually and in small groups come through the portal entrance and into the stadium for the final lap to the finish line. The runners were all different in age, dress, and running style but in one particular way, they were all the same.

Runner after runner—on entering the stadium, seeing the crowd, and hearing the scattered but friendly applause—reached high overhead with both arms in the traditional triumphal Y and held it for at least half a minute, running out the final lap, grinning in victory.

At first, it seemed strange. Didn't they know the Kenyans had won long ago? As time went by—and we were in the stadium for nearly two hours because our friend had caught a cramp and had to slow down—it might have seemed stranger and stranger to see later and later runners act like champions, heroes, and winners. Then it hit me: They were winners. They were all winners because each runner had achieved her or his own realistic objective.

Some finished in less than three hours; some in only three hours; or “only” three and a half hours. Others beat their prior best time. Some won simply by completing the whole marathon, some for their first time and others for their last time.

The powerful message: Each successful runner had achieved his or her own realistic objective, so each one was a true winner and fully entitled to make the big Y and run the victory lap.

If, as investors, we would think and act the same way: understanding our capacities and our limits, we could plan the race that is right for us and, with the self-discipline of a long-distance runner, run our own race to achieve our own realistic objectives. In investing, the good news is clear: Everyone can win. Everyone can be a winner.

The secret to winning the Winner's Game in investing is simple: Plan your play and play your plan to win your game. And if we don't think and work that winning way in investing, we will, by default, be playing the Loser's Game of trying to “beat the market,” a game which almost every investor will eventually lose.

My other favorite investing insight came first over 40 years ago. A freshly minted MBA, I was in a training program in Wall Street.¹ As part of our training, we were to meet each Thursday for the hour before lunchtime with the heads of various departments—syndicate, block trading, research, municipal bonds, etc.—for an introductory explanation of each unit's work.

One day, we were happily surprised to learn that the senior partner had agreed to take a Thursday slot to discuss the larger picture. Mr. Joseph K. Klingenstein—known to his friends as “Joe” and to us as “JK” except when he was or might be present, in which case he was always “Mr. Klingenstein,” wore pince-nez glasses and was patrician, dignified, and erect.

As Mr. Klingenstein spoke about the history of his firm and of Wall Street and its traditions, we listened quietly but not, I fear, very conscientiously. Then five minutes before noon, Mr. Klingenstein had finished his talk and asked, “Do you young gentlemen have any questions?”

Silence.

The silence was broken by the brightest and certainly the most outspoken of our little group. “Yeah, Mistah Klingenstein, I've got a question for you.

“You're rich, Mr. Klingenstein. We all want to be rich too, Mr. Klingenstein. So, what can you tell us from all your experience, Mr. Klingenstein, about how to get rich like you, Mr. Klingenstein?”

Of course, you could have heard the proverbial pin drop—or a butterfly land on a marshmallow. We were mortified. Such a way to speak to such a very great man!

Joseph K. Klingenstein at first appeared angry, perhaps very angry. But then, to our great and collective relief, it became clear that he was silent because he was thinking—thinking very carefully about his many investment experiences. Then, looking directly at his questioner, he said very simply and clearly, “Don't lose.”

After JK rose and left the room, we all went off to lunch, where we agreed, “If you ask a simple question, you'll get a simple answer.” By “simple,” we meant stupid.

As the years have passed, Mr. Klingenstein's advice has come back to me again and again. Now, I know that in two simple words JK gave us the secret of investing successfully for the long term. While all the chatter and excitement is about big stocks, big gains, and “three-baggers,” long-term investment success really depends on not losing—not taking major permanent losses.

We all know that a 50% loss requires a double just to get even, but still we strive for the Big Score, knowing full well that accidents happen most often to too-fast drivers; that Icarus got too close to the sun; that Enron, WorldCom, and many dotcoms had very high “new era” multiples before their obliteration.

Large losses are forever in investing, in teenage driving, and in fidelity. If you avoid large losses with a strong defense, the winnings will have every opportunity to take care of themselves. And large losses are almost always caused by taking too much risk.

If, as investors, we could learn to concentrate on wisely defining our own long-term objectives and learn to focus on not losing as the most important part of each specific decision, we could all be winners over the long term. And if it's too late for any of us because our best years are behind us, it's not too late to tell our children or grandchildren Mr. Klingenstein's great lesson.