Bogleheads

[Random Walker]

A few weeks ago I was thinking of posting a recommendation for Winning the Loser's Game by Charles Ellis. I'm sure it's been mentioned before here, but I don't think it gets recommended enough. This is truly one of the all time great investing books. Lo and Behold, I was browsing through Barnes and Noble today and there is a new edition! I've read the 2002 edition a few times and enjoyed it greatly each time. The new fifth edition is dated 2010. I have not started this new edition yet, but I'm sure it is a must have on any investing bookshelf.
Forward by David Swensen. Some of the chapter titles: the loser's game, mr. market and mr. value, your unfair competitive advantage, building portfolios, performance measurement, predicting the market - roughly.
FWIW, every time I have read this book it has made me more comfortable with an aggressive stock/bond split. Many references to the greatest risk of all being inflation.
Curious to hear other's comments on either edition of this book.

Dave

[subrosa]

I read the 2010 book, my first reading of the oft referenced classic. A couple standout points for me:

- The book itself (at least mine) is crap (just referring to the book, not author or message here). When I look up "Jefferson, Thomas" in a book's index and I see pg 182, I expect to find some reference to Thomas Jefferson on page 182; not some warning on Venture Capital. A pro-indexing fund message in a book with an outdated and useless index. Irony?

- On the issue I find the most interesting among pro-indexing, low cost authors, Ellis is crystal clear: "Don't do commodities". Pg 128 in my book (141 in my book's index...)

- On "The loser's game" I was a little surprised that Ellis, he really isn't dogmatic outside US large caps and EAFE. He allows that small cap, emerging, frontier markets, the indexing argument isn't as strong, and the chance that well researched active managers will outperform index funds. This is worth noting if you see references to Ellis and "the loser's game" pitched, followed by a slice and dice portfolio chock full of small cap, small cap value, and emerging markets (esp if the net cost for these indexes are higher b/c they require advisors fees to get to DFA).

Its not to say Ellis is making an argument for active management (in fact, actually, he does, in "Capital", a book he references at least 2 or 3 times here).

But I do think I have seen his view invoked out of context so to speak. Winning the loser's game, per Ellis pg 50 of the 2010 book, is really referring to the use of total market funds, IMO.
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Please note: this and all posts by me are for entertainment value only & not as medical / legal / tax / financial or other investment advice. Consult your professional in all matters.

[knarf]

"I don't think it gets recommended enough. This is truly one of the all time great investing books... every time I have read this book it has made me more comfortable with an aggressive stock/bond split."

I feel exactly the same way.

Though my Japanese girlfriend, whose father is a successful independent businessman in Tokyo who has socked away 50% of his earnings for the last quarter of a century in secure investments, calls me "the most financially conservative person I have ever met," sometimes I feel like a wild risk-taker when read this forum. The wisdom of Ellis is a source of support.

[Adrian Nenu]

[efmoody]

Inflation will eat away at asset values. But maybe at 3% per year or whatever you want to use. The amount is noted by the government each year and discussed ad infinitum for the future. The calculation of its impact is fairly easy to do.

The risk of loss- such as we have seen twice this decade- has an immediate impact far greater to current wealth. It requires the correct stantdard deviation of the portfolio also encompassing the perceived
correlation.

You can then take that number and calclulate the potential risk of loss for one standard deviation.

So if you want to know what you might face- as most consumers absolutely must address- then you are capable of doing this:

The standard deviation of a portfolio over a period of five years is 8.76. What is the potential risk of loss? You can either do that calculation or you do not know the risks you are taking to your wealth. If you cannot compute that number, you really do not know much about investing. You can talk about low fees, you can talk about buy and hold, you can talk about whatever. But you have to know your risk of loss for the portfolio you have selected or that has been selected for you. Otherwise you are almost clueless to what you are doing.

Go ahead, do it.

[subrosa]

[efmoody]

Very close if not perfect. What I do is to try bring back the SD to a one year period to see if I can figure out what the correlations were and see what adjustments were made by the software. Admittedly next to impossible but the attempt is to see what the adviser/firm/software/planner did in reducing the SD at inception and over time.

Recompute and then to the formula as you have shown.

But it is for one SD and if it comes out to 40%, I usually opt for 40% to 60% because of the excess risks of possible fat tails (which do exist). So I simply can say to Mr and Mrs. Investor, if things go wrong this is your exposure? Are you aware of this; are you willing to take the loss?

Next by stating a recession causes a drop of 40 to 43% average. Can you handle that? Also that this exposure can be reduced by understanding economics.

Etc. etc, etc, etc,