Losing is winning
Defense really does win championships
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And now: football and football.
Europe’s biggest soccer brands recently tried to form a new league — literally called Super League — aimed solely at making more money for themselves and then dissolved said league to preserve the spirit of the sport. A spirit that is about competition, or something. Winning. Doing it the right way. Protecting fan interests. And so on.
The highest level of professional soccer is populated by clubs that are publicly traded, the players are international tax dodgers, and the same handful of teams win the biggest prizes every year. That this serves as the height of competitive integrity is a story for the 21st century if there ever was one.
Of course, as the NYT’s Marc Stein pointed out, what this new league really wanted was to be more American, more like the NBA and the NFL. And more American specifically in that a smaller pool of bigger brands would take the pressure off these clubs to do the hard thing they are now committed to doing in their current leagues — winning.
And yet the most accessible path to durable success in business, sports, and otherwise is shown to us time and again to be losing. There’s an old sports cliche that says defense wins championships. We here at Late like cliches because they endure for being true most of the time. Let’s take the NFL, where this cliche is more prominent than any other sport. This past weekend saw the league’s draft take place. For readers who are not sports-inclined, this is exactly what it sounds like: all of the league’s teams pick players from college to join their roster.
Teams sitting in conference rooms choosing which 21-year-old they want to offer a chance at making their team is, definitionally, very boring. Only in sports and venture capital will you see billions thrown at enticing hardworking people to separate themselves from their leisure time to be exposed to even more interminable meetings. ESPN and ABC dedicate two nights of primetime coverage to the draft. A city, this year it was Cleveland, dedicates a weekend of activities to the draft. And the product continues to grow as one of the sporting year’s marquee events.
But the draft’s growth is really just a proxy for the sport’s growth as a whole. The NFL is a closed system that makes the same number of wins and losses available to every team, every year. But with fewer than half the league’s teams making the playoffs and only a handful of teams having a real chance to win a Super Bowl, fan engagement depends more on the belief that losing amounts to something than winning being realistic because there exists more disappointment than success within the system.
The teams picking highest in the draft — and in theory selecting the most sought after players — lost the most games the prior year. So the entire success of the draft-as-product and the NFL’s perpetual content motion machine is driven by what the league really sells: losing. High draft picks are the league’s defense against fans who want to believe the point of watching games is to see your team win. The draft offers hope that tomorrow’s stars will turn your favorite team around. But the draft is literally a celebration of losing.
And losing, in the end, is what every sport sells. There can only be one winner from any game, any tournament, any season-long competition, and so on. Definitionally, the vast majority of competitors — or the supporters of competitors — will go home disappointed. And disappointment, not success, keeps them coming back.
The NFL’s biggest brand, the Dallas Cowboys, have not even played in the game before the Super Bowl since 1995. Of the league’s 32 franchises, few have had less on-field success in the last 25 years than the Dallas Cowboys, and yet the team’s value has risen from ~$240 million in 1995 to ~$5.5 billion today. Lose well and you, too, can earn 13% per year on your investment.
We started drafting this piece a few weeks back as the Super League drama unfolded, but yesterday Warren Buffett pitched in and helped frame this same idea for public market investors. Near the top of the Berkshire Hathaway shareholders meeting Buffett presented two slides, one with the 20 largest companies today and one with the 20 largest companies in 1989.
The lesson is that history suggests both that the largest 20 companies in the market in 30 years will not be the same as today but that the largest 20 companies in the market in 30 years will be worth more than the largest 20 companies today. In other words, today’s winners will be losers, but you can be a winner by simply betting on all of the stocks instead of having to pick specific stocks.
The advice from Buffett, as always, is do what I say, not what I do. This rubs many people the wrong way and there’s really not a good defense of his position other than to say he’s right — trying to emulate Buffett’s long track record of success running a concentrated portfolio of stock picks is most likely not going to work as well as buying an index fund and enjoying the appreciation of the market broadly.
And what he’s really showing investors in this example is that the way to become a winner is to be a loser. If you buy the index today, you’re buying all of those 20 largest companies1 in their current proportions within the index, positions that are likely to be losers over time. The suggestion in his slides, again, is that if Apple, Amazon, and Microsoft are the three biggest companies today they will not be the three biggest companies in a few decades. You are buying tomorrow’s relative losers in size.
But these losing bets become winners because buying the whole index means you need not care how the index’s composition changes over time. Your investment grows along with the index as a whole while professional investors and the business cycle duke it out over which companies will be the relative winners in some future economic moment.
Prior drafts of this piece involved long(ish) discussions of how companies like Amazon, Costco, and Walmart all employed versions of losing to win. Take this idea to an extreme enough endpoint and it seems like all businesses fit into some version of this template.2 But there are limits to the Substackification of any business idea and we need not confront too many of our shortcomings this time around.
And so but what Buffett, the NFL, and losing to win really preach are stylized versions of simple risk management. Don’t try to do the hard thing — win football games, beat the market over time, etc. — when you can do the easy thing.
For football teams, American or otherwise, this means promise your fans that next year will be different. For investors, this means buy the whole stock market and let someone else worry about the details.
And while it can feel like losing to watch opportunities drift off in other directions, temptation resisted is just a win by another name. And remember: there’s always next year.
Okay, fine, if you’re buying an S&P 500 index fund you’re not buying those companies exactly — Aramco, for instance, is not in the S&P — but we’re going to table the conversation about the S&P itself for another time.
We could never quite get there with Apple, however. They sell a premium product and service at a premium and always sort of have. They won by winning.