"Winning the Loser's Game (third edition)" -- A Gem

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"Winning the Loser's Game (third edition)" -- A Gem

Post by Taylor Larimore » Mon Jul 13, 2015 1:09 pm

Bogleheads:

Author Charles Ellis is a giant in the field of investing. He is the author of many articles and books on investing and taught the graduate school investment courses at both Yale and Harvard. Jack Bogle, wrote in the book's Forward: "He shares my belief that simple approaches, combined with a few critical principles that have been affirmed by financial history, will make the difference between a perilous retirement and a comfortable one."

These are valuable excerpts from Winning the Loser's Game:
"Successful investing does not depend on "beating the market."

"Advice doesn't have to be complicated to be good."

"Investors all too often delegate--or more accurately abdicate--to their investment managers responsibilities which they can and should keep for themselves."

"The problem with trying to beat the market is that professional investors are so talented, so numerous, and so dedicated to their work that as a group they make it very difficult for any one of their number to do significantly better than the others, particularly in the long run."

"It's not how good you are that counts, but how good you are compared with your competitors."

"Trying to beat the market is so extraordinarily difficult to do, and so easy while trying to "do better" -- to do worse.

"Over and over again, facts and figures inform us that investment managers are failing to "perform," that is, to beat the market."

"Investment managers are not beating the market; the market is beating them."

"The historical record is that in the 25 years ending with 1997, on a cumulative basis, over three-quarters of professionally managed funds underperformed the S&P 500 Market Stock Average."

"90% of trading is by seasoned professionals."

"Managers that have had superior results in the past are unlikely to have superior results in the future."

"Regression to the mean (the tendency for behavior to move toward "normal" or average) is a persistently powerful phenomenon in physics and sociology--and in investing."

"Very few investors have been able to outsmart and outmaneuver other investors enough to beat the market consistently over the long term."

"The evidence on investment managers' success with market timing is impressive--and overwhelmingly negative."

"Decisions that are driven by either greed or fear are usually wrong, usually late, and very unlikely to be reversed correctly."

"Don't even consider trying to outguess the market or out maneuver the professionals to "sell high" and to "buy low." You'll fail, perhaps disastrously."

"There is no evidence of any large institutions having anything like consistent ability to get in when the market is low and get out when the market is high."

"The stock market is fascinating and very deceptive--in the short run. In the very long run, the market is almost boringly reliable and predictable."

"If you--like Walter Mitty--still fantasize that you can and will beat the pros, you'll need both luck and prayer."

"The largest part of any portfolio's total long-term returns will come from the simplest investment decision that can be made, and by far the easiest to implement: buying the market."

"Hopelessly unpopular with investment managers and with most clients, the uninspiring, dull "market portfolio" is seldom given anything like the respect it deserves." Ploding along in its unimaginative inexpensive, "no brainer" way, this "plain Jane" form of investing will, over time, achieve better results than most professional investment managers."

"Investors would be wise to devote more attention to understanding the real advantages offered by the market fund."

"Because portfolio turnover in an index fund is very low--about 5%--while the turnover of actively managed mutual funds typically average between 75% and 125% and includes significant amounts of short-term gains, investors pay far less in taxes with an index fund."

"The problem is not in the market, but in ourselves."

"During the 15 years from 1982 to 1997, mutual funds averaged approximately 15% in annual returns. However, mutual fund investors averaged only 10%. Why? Because instead of developing an astute long-term investing program and staying with it, investors jumped around from one fund to another."

"Don't just do something, stand there."

"While you cannot beat the market, you can certainly avoid the problems other investors are making for themselves by trying to hard."

"Short-term risk should not be a major concern to long-term investors."

"The single most important dimension of investment policy is asset mix, particularly the ratio of fixed-income investments to equity investments."

"Investors devote most of their time and skill trying to increase returns from changes in market prices--by outsmarting each other. They are making a big mistake."

"Treasury bills are usually no more than a match for inflation."

"When asked what he considered man's most powerful discovery, Albert Einstein replied without hesitation: "Compound interest.""

"Riskiness is akin to uncertainty in investing."

"The great advantage of an index fund, a portfolio that replicates the overall market, is this: Such a fund provide a convenient and inexpensive way to invest in equities, with the riskiness of particular market segments and specific issues diversified away."

"Managing market risk is the primary objective of investment management."

"If you do not need to sell and don't sell, you really shouldn't much care about the nominal fluctuations of stock prices."

"An efficient portfolio maximizes expected returns at a deliberately chosen level of market risk."

"The great secret for success in long-term investing is to avoid serious losses."

"The principal reason you should articulate your long-term investment policy explicitly and in writing is to protect your portfolio from ad hoc revisions of long long-term policy."

"The main reason for studying and understanding investments and markets: To protect our portfolios from ourselves."

"Most investors experience great anxiety over large-scale, sudden and frightening losses in portfolio value primarily because they have not been well informed in advance that these events are expected and considered normal by those who have studied and understand the long history of stock markets."

"Don't confuse brains with a bull market."

"Factors that most affect the prices of securities (fear, greed, inflation, politics, economic news, business profits, investors' expectations, and so forth) never cease to change."

"Statisticians debate amongt themselves whether it takes 40, 60, or 80 years to determine definitively where the incremental return obtained by a particular portfolio is attributable to luck or to skill."

"Almost always, the most important factor in the reported performance of an investor or a professional investment manger is not his or her skill but the choice of starting date and ending date."

"Short-term thinking is the enemy of long-term investment success."

"Never risk more than you know you can afford to lose."

"It makes sense to concentrate on one or two fund families whose long-term investment results and business values and practices you respect."

"Like Icarus, trying too hard can lead to serious harm. Switching around among mutual funds is what causes the average mutual fund investor to obtain long-term returns that produce a distressing one-third less than the average mutual fund."

"Short-term losses are an unavoidable cost of long-term investment success."

"The long, sad history of market timing is clear: Virtually nobody gets it right even half the time."

"Never terminate a (mutual) fund manager solely for below-market performance over a several-year period."

"For individual investors, inflation is the major problem most of the time" (4% inflation for 18 years cuts money in half).

"If you find yourself getting caught up in the excitement of a rising market or distressed by a falling market, stop. Break it off. Go for a walk and cool down. Otherwise, you will start making errors, grave errors that you will regret."

"Don't buy on tips. Ever."

"Don't do anything in investing primarily for "tax reasons."

"Never do commodities. Consider the experience of a commodities broker who, over a decade, advised nearly 1,000 customer on commodities. How many made money? Not even one."

"Don't be confused about stockbrokers. They are usually very nice people, but their job is not to make money for you. Their job is to make money from you."

"Don't invest in new or "interesting" investments."

"The secret to long-term investment success is benign neglect. Don't try too hard. Leave compounding alone to do its good work for you."

"How your investments behave is beyond your control. But how you behave in response to their fluctuation is within your control."

"Most people underestimate both the compounding impact of inflation and the onerous cost of end-of-life health care."

"Don't change your investments just because you have come to a different age."

"Inflation is the ruthless, unrelenting destroyer of your capital. To purchase an item costing $100 in 1960 would have cost $500 in 1995."

"The key to getting out of debt is clear: Save! A lifetime based on the habit of thrift--spending less than you might and deferring the spending you do-- is essential to saving."

"Taxes and inflation are rightly called fearsome "fiscal pirates."

"Retirement is expensive--partly because we live longer than did our parents and grandparents, and partly because inflation can be such a powerful and unrelenting opponent."

"Any funds that will be invested for less than two to three years should be in "cash" or money market instruments."

"Providing for your retirement is one of three important challenges. Bequests and gifts to those you love is another. The third--"giving back" to our society--can be exciting and fulfilling."

"A large inheritance is not necessarily wonderful for your children."

"You'll want to get expert legal advice when formulating a sound estate plan."

"Everyone who can qualify for an Individual Retirement Account (IRA) should have one."

"Any guy who dies with more than $10 grand has made a mistake." (Errol Flynn quote)

"Most of the managers and clients who insist on trying to beat the market, either on their own or with professional managers, will be disappointed by the results. It is a loser's game.

"You should set your portfolios' asset mix at the highest ratio of equities that your economic and emotional limitations can afford and sustain over the long term."

"You must understand the turbulent nature of markets in the short term and the basic consistency of market in the long term."

"To win the loser's game of "beating the market" is easy: Don't play it."
Link to MORE INVESTMENT GEMS

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by bengal22 » Mon Jul 13, 2015 1:26 pm

Thanks for the quotes, Taylor. They are like the Proverbs of Finance.

Regarding the quote below, if it is difficult to predict the future and pick stocks wouldn't the statement be more like: Managers that have had superior results in the past are no more likely to have superior results in the future than other managers?" Seems like with the laws of probability and the Random Walk theory that all managers have an equal chance of success in the future regardless of the past. Am I wrong? If not we could just pick mutual funds that have done lousy in the past.
"Managers that have had superior results in the past are unlikely to have superior results in the future."
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

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High and low-cost funds?

Post by Taylor Larimore » Mon Jul 13, 2015 2:27 pm

Seems like with the laws of probability and the Random Walk theory that all managers have an equal chance of success in the future regardless of the past. Am I wrong?
Bengal:

I believe you are more right than wrong. There is evidence that average high cost mutual funds underperform low-cost mutual funds.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by Toons » Mon Jul 13, 2015 2:43 pm

"The stock market is fascinating and very deceptive--in the short run. In the very long run, the market is almost boringly reliable and predictable."

I remember reading his book years ago,,,that was a quote that I never forgot. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by ajacobs6 » Mon Jul 13, 2015 2:51 pm

So awesome, thank you! What about where he says "Don't invest in TIPS. Ever." His Wealthfront portfolios have TIPS in them....I'm a bit confused on his actual stance on this.

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by Taylor Larimore » Mon Jul 13, 2015 3:13 pm

ajacobs6 wrote: "Don't invest in TIPS. Ever." His Wealthfront portfolios have TIPS in them....I'm a bit confused on his actual stance on this.
ajacobs6:

Mr. Ellis was referring to stock recommendation "tips." Not Treasury Inflation-Protected bonds (TIPS).

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by lack_ey » Mon Jul 13, 2015 3:17 pm

bengal22 wrote:Thanks for the quotes, Taylor. They are like the Proverbs of Finance.

Regarding the quote below, if it is difficult to predict the future and pick stocks wouldn't the statement be more like: Managers that have had superior results in the past are no more likely to have superior results in the future than other managers?" Seems like with the laws of probability and the Random Walk theory that all managers have an equal chance of success in the future regardless of the past. Am I wrong? If not we could just pick mutual funds that have done lousy in the past.
"Managers that have had superior results in the past are unlikely to have superior results in the future."
The quote has empirically been true.

However, the random walk model of stock pricing is empirically false in multiple ways, so you should be careful in citing it as theoretical justification for anything. The observed data does not fit a true random walk. It does, however, appear somewhat close to that in some key ways, and knowing some things about the distribution and behavior does not at all necessarily imply profitable knowledge. In fact, many statistical irregularities in the short term (from a true random walk or some other model) persist because the costs of exploiting them are greater than the rewards. It is also seen in other markets that behavior does not really look like a random walk, and some stock markets at times have behaved in more predictable (and exploitable) ways than the US stock market.

That said, relationships and properties seen in the past may or may not persist. Markets change.

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by shawcroft » Mon Jul 13, 2015 3:19 pm

Taylor Larimore wrote:Mr. Ellis was referring to stock recommendation "tips." Not Treasury Inflation-Protected bonds (TIPS).
Taylor:
Thanks for that clarification.
Shawcroft

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by MountainTop » Mon Jul 13, 2015 5:38 pm

Toons wrote:"The stock market is fascinating and very deceptive--in the short run. In the very long run, the market is almost boringly reliable and predictable."
Can anyone explain why in the long term the market is reliable and predictable?

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Why in the long term the market is reliable and predictable.

Post by Taylor Larimore » Mon Jul 13, 2015 6:15 pm

MountainTop wrote:
Toons wrote:"The stock market is fascinating and very deceptive--in the short run. In the very long run, the market is almost boringly reliable and predictable."
Can anyone explain why in the long term the market is reliable and predictable?
MountainTop:

Looking at rolling 30 year returns between 1802 and 2006, the lowest and highest annualized real returns have been 2.6% and 10.6%, respectively.* There was never a stock market loss during these 30 year periods.

* Source: Guide to Rational Investing

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by bengal22 » Mon Jul 13, 2015 8:24 pm

lack_ey wrote:
bengal22 wrote:Thanks for the quotes, Taylor. They are like the Proverbs of Finance.

Regarding the quote below, if it is difficult to predict the future and pick stocks wouldn't the statement be more like: Managers that have had superior results in the past are no more likely to have superior results in the future than other managers?" Seems like with the laws of probability and the Random Walk theory that all managers have an equal chance of success in the future regardless of the past. Am I wrong? If not we could just pick mutual funds that have done lousy in the past.
"Managers that have had superior results in the past are unlikely to have superior results in the future."
The quote has empirically been true.

However, the random walk model of stock pricing is empirically false in multiple ways, so you should be careful in citing it as theoretical justification for anything. The observed data does not fit a true random walk. It does, however, appear somewhat close to that in some key ways, and knowing some things about the distribution and behavior does not at all necessarily imply profitable knowledge. In fact, many statistical irregularities in the short term (from a true random walk or some other model) persist because the costs of exploiting them are greater than the rewards. It is also seen in other markets that behavior does not really look like a random walk, and some stock markets at times have behaved in more predictable (and exploitable) ways than the US stock market.

That said, relationships and properties seen in the past may or may not persist. Markets change.
"The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus cannot be predicted. It is consistent with the efficient-market hypothesis." Not sure I agree that one can consistently guess which way the market is heading. That is the beauty of index investing. It will probably match monkeys picking stocks but the expense ratio is lower. The whole foundation of "staying the course" and not trying to guess the market is because it is cheaper and just as efficient. And since the past has little bearing on the success of a fund manager, I also agree that they have equal chances with low performing managers in the future.
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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by LadyGeek » Mon Jul 13, 2015 8:38 pm

Is this a review of the third edition (published 1998), as the sixth edition is current (published 2013)?

- Winning the Loser's Game (3rd ed) - Published 1998

- Winning the Loser's Game, 6th edition - Published July 12, 2013

If there's not much difference, the 6th edition is $3.49 cheaper on Kindle.

In hardback, you can get the 3rd edition for $0.01.

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by lack_ey » Mon Jul 13, 2015 8:43 pm

bengal22 wrote:
lack_ey wrote:
bengal22 wrote:Thanks for the quotes, Taylor. They are like the Proverbs of Finance.

Regarding the quote below, if it is difficult to predict the future and pick stocks wouldn't the statement be more like: Managers that have had superior results in the past are no more likely to have superior results in the future than other managers?" Seems like with the laws of probability and the Random Walk theory that all managers have an equal chance of success in the future regardless of the past. Am I wrong? If not we could just pick mutual funds that have done lousy in the past.
"Managers that have had superior results in the past are unlikely to have superior results in the future."
The quote has empirically been true.

However, the random walk model of stock pricing is empirically false in multiple ways, so you should be careful in citing it as theoretical justification for anything. The observed data does not fit a true random walk. It does, however, appear somewhat close to that in some key ways, and knowing some things about the distribution and behavior does not at all necessarily imply profitable knowledge. In fact, many statistical irregularities in the short term (from a true random walk or some other model) persist because the costs of exploiting them are greater than the rewards. It is also seen in other markets that behavior does not really look like a random walk, and some stock markets at times have behaved in more predictable (and exploitable) ways than the US stock market.

That said, relationships and properties seen in the past may or may not persist. Markets change.
"The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus cannot be predicted. It is consistent with the efficient-market hypothesis." Not sure I agree that one can consistently guess which way the market is heading. That is the beauty of index investing. It will probably match monkeys picking stocks but the expense ratio is lower. The whole foundation of "staying the course" and not trying to guess the market is because it is cheaper and just as efficient. And since the past has little bearing on the success of a fund manager, I also agree that they have equal chances with low performing managers in the future.
I mean in the pure mathematics/statistical sense. Based on thousands of daily stock movements, the observed distribution does not seem to fit that of a true random walk. For example, the annual standard deviation is not what you'd expect based on a true random walk with the observed daily standard deviation. Growth would probably be less consistent than it is if it were really a random walk. There would be no mean reversion phenomenon (that said, not everybody looks at the data and believes that happens as it is).

A random walk has a precise statistical meaning. Just because it's not really a random walk does not mean that the direction is predictable with any certainty.

It's like you're calling an object a square and I'm saying that people have measured the sides and they're not quite all the same length. Doesn't mean that it still doesn't have four sides and is a rectangle and may effectively be close enough to a square for many purposes, but you want to be careful in invoking the fact it is a square (because it's not quite) when trying to logically prove something about something else.

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Re: "Winning the Loser's Game (third edition)" -- A Gem

Post by abuss368 » Tue Jul 14, 2015 3:39 pm

ajacobs6 wrote:So awesome, thank you! What about where he says "Don't invest in TIPS. Ever." His Wealthfront portfolios have TIPS in them....I'm a bit confused on his actual stance on this.
Hi ajacobs6,

One item you may notice with TIPS is Wealthfront only recommends TIPS when utilizing their recommend portfolio tool for the most conservative portfolio allocation. Vanguard no longer recommends the Intermediate TIPS fund and only includes the Short Term TIPS fund in the Target funds near and including retirement.

Best.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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