I recently scrutinised the track record of this 41-year-old gent who has been in his industry for 15 years. I found that he has a win rate of 58.84%.^[1] Now that did not sound impressive!

Only in 5 out of 12 attempts did he top the tables and in what can be described as the most challenging situation this person’s record stands at only 50% success.^[2] Do you think this is a good track record? Would you hire this person for the task at hand?

Turns out the whole country adores this person. You may have guessed that I am talking about cricket and its maestro MS Dhoni, the much-venerated captain of Chennai Super Kings (CSK) and the former captain of the Indian team.

The above-mentioned figure is his track record as captain in the IPL tournament over 16 years. Dhoni has competed for CSK in the tournament 12 times, leading them to the final 10 times and winning the final five times. Arithmetically it means he lost in the finals 50% of the time. He led CSK as captain in 226 matches: winning 133 matches and losing 91 of them. That gives him a success rate of ‘merely’ 58.84%.

However, the man is a living legend and I would submit that all of India loves and cherishes him. Turns out you don’t have to win every day or in every match to achieve the status of a legend.

Losing, or in other words ‘not winning’, is a part of the process of sports, life and investing. To be successful you don’t have to win every game and every stock does not have to be a multi-bagger. You are going to make some wrong decisions: in sports, life and investing.

The words of another sporting legend, basketball player Michael Jordan, who won 6 NBA titles with the Chicago Bulls, seem apt:

"I've missed more than 9,000 shots in my career. I've lost almost 300 games. Twenty-six times, I've been trusted to take the game-winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed." ^[3]

Losing is part of winning: in sports, life and investing. We don’t remember Jordan as the player who failed to win the NBA in 9 out of 15 attempts or Dhoni as the captain who failed to win the IPL in 7 out of 12 attempts. Did the failures make Michael Jordan lose confidence?

No! In his words:

“I've never been afraid to fail.”

And in case you still don’t get the point, here’s Jordan talking once again about the importance of ‘failing’:

“To learn to succeed, you must first learn to fail.”

Mistakes are companions in your journey to success. They are occasions that should give you a reason to reflect and learn. It is instructive to see how Dhoni talks about success. In his address to students appearing for exams, this is what he had to say:

“I often talk about how the process is more important than the result; the result is just a by-product of the process. But in today’s world, we are so focused on the by-product that we get away from the process. So, take care of the process, all the small things and eventually you will get the desired result.” ^[4]

The focus for this highly successful player and captain is not on winning! In fact, he describes winning as the ‘by-product’. The focus is on staying true to the process and to the game.

Are errors acceptable in the world of investing?

So, what does all this have to do with investing and my monthly CIO commentary?

I don’t wish to stretch the sports analogy too far. But the reality and my own experience is that in investing there will always be errors. Nobody has a zero-strike rate on errors. We all make errors.

What matters is:

i) how large these errors are

ii) whether the errors end your ability to participate

iii) whether the errors are merely bumps in the road

iv) if the errors are inevitable in your journey towards achieving your financial goals

There are two simple ways to think about errors in investing:

1. Margin of Safety

2. Terminal Risk

The world is an uncertain place and it is best to think probabilistically and keep a ‘margin of safety’. Would you wait to refuel your car till you are down to the last few drops of fuel in the tank? Or would you drive to the nearest gas station immediately after the dashboard warns you of low fuel? You would choose the second option, which is the 'margin of safety’. And that is exactly what good investors do. It’s the only way to navigate a world governed by probabilities, not certainties.

‘Margin of safety’ guides you to invest in such a way that you can tolerate a range of potential outcomes rather than only the one perfect outcome — one that you are highly convinced about. When Microsoft was a young company Bill Gates implemented a very conservative idea: that the company should always have enough money in the bank account to meet its employees’ expenses for a year even if they did not have any income. That’s ‘margin of safety’.

Our own legendary investor Rakesh Jhunjhunwala, who passed away last year, had this to say:

“When I evaluate an entry price, I always look for a margin of safety. I look at the gap between the entry price and the price in a scenario in which most of the positive assumptions don’t pan out as expected.” ^[5]

When it comes to risk-taking what matters is not just the probability of being wrong but the consequences of the decision. In other words, you don’t want to take a risk such that an adverse event would completely wipe you out.

An apt and succinct summary of this comes from the investor Mohnish Pabrai:

“Heads I win, tails I don’t lose much.” ^[6]

This approach lets you stay in the game longer and time is the most under-estimated variable in investing outcomes. The reason not to play Russian roulette is not the odds but that you get your head blown out if you lose. That’s ‘terminal risk’ or ‘terminal error’. In investing, I associate this very closely with leverage.

The value of sports and what it means to lose in public was brought home to me by India’s most famous badminton player and current national coach P Gopichand. I had the opportunity to listen to him in person many years ago. What he said that day stuck in my head: ‘everybody should play sports because it teaches you that there is no shame in losing, that too in front of an audience. You get up early the next day, practise and enter the field again’.

Here, I quote Gopichand:

“We see many people are not ready to handle failures because they were not exposed to failure in their childhood. When a kid loses a tournament in front of everyone, family and friends, it’s a public failure. And imagine when he comes back and wins next time, what a positive impact he has on the rest of his life. The sport helps him to handle public failure at a very young age. In sports, not everyone can become a champion, but the valuable life lessons you get while playing matter the most. Whether you win or lose, you are still a champion.” ^[7]

But before I get to the end - what about the 40% of the decisions you don’t get right?

The answer to that can be found in the wise words of MS Dhoni.

“A loss makes you humble. Also, if you keep winning you don’t know what area you need to work on.” ^[8]

References

1. Records in Indian Premier League: Most matches as captain
2. List of Indian Premier League seasons and results
3. 23 Michael Jordan Quotes that will immediately boost your confidence
4. The process is more important than the result: M S Dhoni
5. RIP Rakesh Jhunjhunwala: ‘Bhaiya’ For Insiders, ‘Rocky’ For Markets And ‘Big Bull’ For Everyone Else
6. Dhandho. Heads I win; Tails I don’t lose much — Mohnish Pabrai
7. Sports teaches you to handle failure – P Gopichand
8. Top 10 inspirational quotes by MS Dhoni

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