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Winning by not losing: The silver rule of investing

There’s a peculiar irony in investing: the more aggressively you try to compress your timeline and chase that one massive windfall, the more likely you are to stumble.

Sure, we can’t resist a dazzling growth story—finding the next Apple oe Amazon that could turn every dollar into ten. And if you do pick a genuine moonshot, the results can be life-altering. However, concentrating on the chase for a big winner is also a high-risk approach, often leading us to disrupt perfectly good compounding journeys in pursuit of an elusive all-or-nothing success.

One path to lasting wealth, however, isn’t about adding more stocks, more trades, or more risk. It’s about subtracting—removing errors, avoiding catastrophic losses, and letting time do the heavy lifting.

This is the essence of the Silver Rule of investing: focus not just on winning, but on not losing. As Charlie Munger famously said:

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.

Let’s explore why eliminating mistakes—and staying in the game—is often the surest way to harness the power of compounding.

The Battle of Britain: A lesson in strategic subtraction

In a recent interview, Terry Smith of Fundsmith highlighted Air Chief Marshal Sir Hugh Dowding’s tactics during the Battle of Britain as a prime example of “winning by not losing.” In 1940, the Royal Air Force faced a seemingly insurmountable challenge: defending Britain against the Luftwaffe’s 2,800 planes with just 650 fighter aircraft.

Rather than fielding massive 'Big Wing' formations (favoured by Air Vice-Marshal Leigh-Mallory), Dowding and Sir Keith Park used small, frequent sorties, denying Germany a decisive knockout punch. This strategy steadily eroded the Luftwaffe’s strength without exposing the RAF to annihilation in one big battle. Unable to claim air supremacy, the Germans eventually abandoned their invasion plans.

Dowding’s logic was simple: preserve and endure. Larger formations took too long to assemble and risked the RAF’s smaller force all at once. By chipping away at the Luftwaffe bit by bit, the RAF stayed in the fight—and denied the enemy total victory.

Investing works the same way. You don’t need to hit home runs to win. You just need to stay in the game long enough for compounding to work its magic. Focus on endurance, not annihilation.

The power of inversion: Avoiding the worst to find the best

In mathematics and philosophy, inversion is a powerful tool for solving problems. Instead of asking, “How can I find the perfect investment?” ask, “How can I avoid the worst ones?”

This mindset shift is at the heart of the Silver Rule. By focusing on what not to do, you create a framework for consistent, long-term success.

For Terry Smith, rather than obsessing over finding the single 'greatest stock ever', his team embraces the motto: “Buy good companies, don’t overpay, do nothing.” This translates into a portfolio with strong balance sheets, durable competitive advantages, and reliable cash flows. By steering clear of glaring missteps—like overpriced hype stocks—Fundsmith has repeatedly beaten its benchmarks over time

Francois Rochon of Giverny Capital takes a similar approach. He compiles an annual “podium of errors", ensuring that each mistake becomes a lesson rather than a recurring pitfall. It’s no coincidence that Giverny has compounded at nearly 15% annually for three decades—that’s the power of actively avoiding big blunders.

Ultimately, both Fundsmith and Giverny Capital have landed extraordinary winners in their portfolios, but they arrived there by filtering out the losers first.  Invert your thinking: focus on avoiding the worst mistakes, and the best opportunities will often reveal themselves.

The amateur’s advantage: Letting others lose

In his book Extraordinary Tennis for Ordinary Players, Simon Ramo observed a fascinating pattern: amateur tennis matches are rarely won by brilliant plays. Instead, they’re lost through unforced errors—balls knocked into the net or sent flying out of bounds.

The same principle applies to investing. Most investors don’t lose money because they fail to pick the next Nvidia or Pro Medicus. They lose because they make avoidable mistakes—overpaying for hype, venturing outside their circle of competence, or panic-selling during downturns.

Warren Buffett’s first rule of investing – “Don’t lose money” – isn’t about avoiding all losses. It’s about avoiding catastrophic losses. Just as a recreational tennis player can win by keeping the ball in play, investors can outperform by simply staying in the game. Let others lose by avoiding unforced errors.

Compounding: The silent multiplier

The real magic of the Silver Rule lies in its ability to protect your capital, giving compounding room to work. Compounding isn’t just about returns; it’s about time.

And time is the one resource you can’t replenish.

A single catastrophic loss can derail years of progress. For example, a 50% loss requires a 100% gain just to break even. By avoiding such setbacks, you keep your compounding engine running smoothly.

This isn’t about being ultra-conservative or avoiding risk altogether. It’s about making judicious decisions—investing in businesses you understand, avoiding speculative bets, and managing your emotions. Over time, these small, consistent wins can compound into something extraordinary. Protect your capital to let compounding work its magic.

The slow path to big wins

History shows that the investments that deliver 50x or 100x returns often take decades to materialise. Think of Nvidia (NASDAQ:NVDA), which spent years as a niche graphics card company before becoming a leader in AI and data centres. Or Pro Medicus (ASX:PME), which quietly revolutionised medical imaging software over two decades before its stock soared.

The key to finding these outliers isn’t frenetic trading or chasing hot tips. It’s patience—staying invested in quality businesses and avoiding the mistakes that could knock you out of the game.

By focusing on subtraction—removing errors and avoiding catastrophes—you put yourself in the best position to benefit from these rare, transformative winners. Patience pays: the biggest winners often take decades to materialise.

Final takeaway: Embrace the Silver Rule

In a world obsessed with instant gratification and quick wins, the Silver Rule offers a refreshing counterpoint. It’s not about being the smartest person in the room or predicting the next big thing. It’s about being disciplined, patient, and humble enough to avoid stupidity.

As Munger reminds us, “It’s not supposed to be easy. Anyone who finds it easy is stupid.”

So, the next time you’re tempted to chase a hot stock or make a speculative bet, ask yourself: “How can I avoid losing?” By focusing on subtraction, you’ll not only protect your capital but also create the conditions for compounding to work its magic.

In the end, the surest path to winning is often simply not losing.

 

Leigh Gant is the Founder and CEO at Unio Growth Partners. This article is for general information purposes only as it does not consider the individual circumstances of any person. Investors should seek professional investment advice before acting.

 

12 Comments
C Butler
March 20, 2025

Thanks such good points, quality companies with moats, good balance sheets, are foundations to protecting investments.

Growth stocks are exciting, interesting, testing and exhausting to follow and pay minor dividends.
Do growth stocks compound? I'm never sure, but quality companies with dividends, yes their results do compound.

Rick
March 17, 2025

As Niki Lauda famously stated, "The secret is to win going as slowly as possible.”
I think a successful approach to investing for retirement is to aim to get rich slowly…it’s hard to convince younger generations of the merit of this way of thinking though.

Rod in Oz
March 17, 2025

Good advice with a philosophical twist. I like the negative inversion idea.
Stephen F - thanks; you make a couple of good practical points.

D Ramsay
March 17, 2025

Thanks Leigh - great read.
Charlie's line - “It’s not supposed to be easy. Anyone who finds it easy is stupid.”

It echoes behaviour of people I have observed that are obviously not well informed about a certain task or topic and they start by saying "Oh that's easy ....." whereas when you talk to an expert or someone of vast experience they often start with "Its not simple and can get quite complicated ...."

Keyur Shah
March 17, 2025

This advice is "Simple but not Easy"

As it is asking to play a Long Term Game, avoiding Blunders and staying Above Average on a Consistent basis for a real long time.

If we can execute this strategy as intended, high probability of success is guaranted.

Stephen F
March 16, 2025

Reminds me of Charles Ellis and his book Winning the Loser's Game. Leigh makes some very good points. However investors need simple and practical rules to follow. One worth considering is a stop loss at say 20% below purchase price. This works for momentum investors but won't work for value investors because, in theory, the stock becomes better value as it falls. This is a big advantage for momentum investors. Another strategy is to keep a permanent allocation to gold bullion of say 30% of the portfolio. Over the last 20 years gold has given an equal return to the All Ordinaries Accumulation Index but with strong negative correlation, so is a very good hedge. It reduces the temptation to load up in bull markets and sell out in bear markets.

Maurie
March 18, 2025

Great article Leigh. No wonder compounding is the eighth wonder of the world; everyone is too busy chasing the maximum performance which inevitably leads to whatever is hot. Not too many think about the downside because that only happens to the other guy. To Stephen F's point, Charles D Ellis book is a timeless piece of non-fiction.

Arvind
March 31, 2025

A trailing stop loss is a better strategy in my opinion.Getting anchored to the purchase price is counterintuitive...

Steven Mabb
March 15, 2025

Well said Leigh. It's very sensible and very simple advice. So, why would that work? In my experience it's because most investors, whether professional or individuals, aren't able to execute this approach which needs ongoing discipline and patience.

Paul R
March 14, 2025

Great article, Leigh. I believe investors underestimate the impact of negative returns on long-term performance.

Protecting capital is vital for long term compounding to work its magic.

Leigh
March 18, 2025

Thanks Paul, glad you enjoyed it.

Protection doesn't get enough praise

Dudley
March 18, 2025

One way to protect capital is to not risk it. Which requires an elegant sufficiency of capital.

In the absence of sufficient, forced to risk it, or adjust notion of sufficient.

 

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