Winning the Loser's Game - Charles Ellis

[Robert T]

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IMO one of the best investing books is Charles Ellis’s “Winning the Loser’s Game”. I have just read the fifth edition. Here are ten (timeless) quotes:

• 1. “Real risk is simple: not enough cash when money is really needed - like running out of gas in the desert.”
  
  2. “An investment strategy that is wisely formulated with a long-term perspective and clearly defined objectives is the strong foundation on which portfolios should be constructed and managed over time and through market cycles.”
  
  3. “Portfolio management is investment engineering.”
  
  4. “Soundly conceived, persistently followed long-term investment policies are the pathway to success in investing.”
  
  5. “Education is usually your best investment.”
  
  6. “Thoughtful, objective study of the past is the best - and least costly - way to develop an understanding of the basic nature of markets. That’s why it pays to study the rates of return and patterns of deviation from the averages over the past several decades, learning as thoroughly as possible why markets move as they do.”
  
  7. “Don’t confuse facts with feelings.”
  
  8. “The winning investors are not in competition with each other, they are in competition only with themselves.”
  
  9. “The great secret of success in long-term investing is avoiding serious, permanent loss.”
  
  10. "The saddest chapters in the long history of investing are tales about investors who suffered serious losses they brought on themselves by trying too hard or by succumbing to greed.”

And five from Swensen’s Foreward

• 1. ”Sensible investors rely on themselves.”
  
  2. “When profit motive meets fiduciary responsibility, profits win, investors lose.”
  
  3. "Focus on asset allocation."
  
  4. "Risk tolerance plays a central role in asset allocation decisions."
  
  5. “…recognize the primacy of index funds…”

Robert
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[Blue]

Nice list of timeless quotes. It prompted me to order the 5th edition through Amazon.

[BigD53]

10. "The saddest chapters in the long history of investing are tales about investors who suffered serious losses they brought on themselves by trying too hard or by succumbing to greed.”

The "succumbing to greed" part is the Big BAILED-OUT Investment Banks and the Mortgage Industry in 2008!!!

And because of their corruption, we "the investors" suffered serious losses.

Gee, do ya think they learned anything? :roll:

Nah.

It's all about the buck, kid.

[Wagnerjb]

10. "The saddest chapters in the long history of investing are tales about investors who suffered serious losses they brought on themselves by trying too hard or by succumbing to greed.”

The "succumbing to greed" part is the Big BAILED-OUT Investment Banks and the Mortgage Industry in 2008!!!

And because of their corruption, we "the investors" suffered serious losses.

Gee, do ya think they learned anything? :roll:

Nah.

It's all about the buck, kid.

There is plenty of greed in the world. The particular quote is about the greed that investor's exhibit.

[Robert T]

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On the 2008 decline – these quotes from Ellis’s book are instructive IMO.

• “…the more you study market history, the better; the more you know how securities markets have behaved in the past, the more you’ll understand their true nature and how they probably will behave in the future. Such an understanding enables us to live rationally with markets that would otherwise seem wholly irrational. … At least we would not so often get shaken loose from our long-term strategy by the short-term tricks and deceptions of Mr. Market’s gyrations. Knowing history and understanding its lessons can insulate us from being surprised.…For the serious student of markets, they are not truly surprises: Most are really almost actuarial expectations, and long-term investors should not over-react.”
  
  “Sharp losses are to be expected and even considered normal by those who have studied and understand the long history of stock markets.”

---------------------------

Andy,

Swensen’s Foreward has a section on one of your favorite active fund managers : ) – it's titled “A Sorry Tale” (although Swensen doesn't name the manager, its fairly obvious who he is referring to, highlighting the managers much celebrated 15-yr S&P500 beating record). It concludes as follows:

• “The story of the first hot, then ice-cold fund manager exemplifies the pathology of the mutual fund industry. On the way up, the fund management company and the press lionize the manager, attracting attention to the winning strategy. Investors respond by throwing bushels of money at the seemingly invincible stock picker. Assets under management and performance peak simultaneously. Investors suffer as performance deteriorates. The fund management company, the press, and the public turn their attention elsewhere, ignoring the embarrassment of the fallen hero. The fund management company gets paid. The fund manager gets paid. The investor pays.”

Robert
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[baw703916]

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IMO one of the best investing books is Charles Ellis’s “Winning the Loser’s Game”. I have just read the fifth edition. Here are ten (timeless) quotes:
...
5. “Education is usually your best investment.”
...

Is college worth it?

Does it pay to invest in a college education

What happened to College costs?

Maybe some more Bogleheads should read this book?

Brad

[docneil88]

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On the 2008 decline – these quotes from Ellis’s book are instructive IMO.

• Knowing history and understanding its lessons can insulate us from being surprised.…For the serious student of markets, they are not truly surprises: Most are really almost actuarial expectations, and long-term investors should not over-react.”
  
  “Sharp losses are to be expected and even considered normal by those who have studied and understand the long history of stock markets.”

I knew the history, but I hadn't lived it. I had weathered the 2000-2002 market debacle well and did not capitulate, because I knew the history and I'd been mostly in value equities, which did relatively better than growth during that debacle. Plus the S&P 500's decline peak to trough was about 49% vs. the 58% that was to come in '07 to '09. I knew that maybe twice in a century there'd be a bear market that'd bring down the S&P 500 58% or more from its peak. But I didn't expect Nov. '07 to March '09 would be that rare period. When it happened, and some of the largest banks, brokerages, and insurance companies went bankrupt or were on the verge of bankruptcy, and value equities were being hit about as hard as growth, I was scared.

Then Taylor Larimore had a post saying roughly that he'd sell some equities only if he couldn't afford to risk losing much more. I then told myself I couldn't afford to risk losing much more, and I sold some equities near the bottom (luckily not a huge amount). But I'm not proud of it. I learned what my risk tolerance was. I also came to understand the full meaning of the term "capitulation risk." These were expensive lessons that left far more of a lasting impression than any financial history book could have. I wish there was a virtual reality machine or something that could have taught me better than a history book, and without the huge expense of the real-life lesson. Best, Neil

[Rick Ferri]

I have three different editions of Winning the Loser's Game including the 1st and the latest. I agree with Robert T. This is by far the best book on Investment Policy ever written.

Rick Ferri

[Robert T]

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Niel,

I appreciate your honesty.

An earlier message from Bernstein has always stuck with me: (from his Four Pillars book) [my underlines]:

• “Examining historical returns and imagining losing 50% or 80% of your capital is like practicing an airplane crash in a simulator. Trust me, there is a big difference between how you’ll behave in the simulator and how you’ll perform during the real thing. During bull markets, everyone believes that they’re committed to stocks for the long term. Unfortunately, history also tells us that during bear markets, it’s hard even to give stocks away; most investors are simply not capable of withstanding the vicissitudes of an all-stock investment strategy.”

Something to consider when establishing a long-term policy target. And in my experience (personal view) having a clear investment policy (that articulates the reasons for decisions made) helped during the 2008 downturn.

As Swensen says in his forward to Ellis’s books [my underlines]:

• “Each of these books outlines an easy-to-understand solution that could be distilled to two or three pages of prose. Why, then, do the books run hundreds of pages each? While it takes a short time describe the conclusion, the bulk of the message provides the motivation for establishing a sensible program and the conviction for maintaining it through thick and thin.”

And from Ellis’s chapter on “Why Policy Matters”

• “The principal reason you should articulate your long-term investment policies explicitly and in writing is to protect your portfolio from yourself - helping you adhere to long-term policy when Mr. Market makes current markets most distressing and your long-term investment policy suddenly seems most seriously in doubt.”…”Don’t trust yourself to be completely rationally when those all around you are driven by emotion. You are human too.”

I think it matters (all helps).

Robert

[MarkNYC]

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And from Ellis’s chapter on “Why Policy Matters”

• “The principal reason you should articulate your long-term investment policies explicitly and in writing is to protect your portfolio from yourself - helping you adhere to long-term policy when Mr. Market makes current markets most distressing and your long-term investment policy suddenly seems most seriously in doubt.”…”Don’t trust yourself to be completely rationally when those all around you are driven by emotion. You are human too.”

I think it matters (all helps).

Robert

Somewhere in his book, Ellis summarized it well by saying "The hardest work in investing is not intellectual, but emotional."

[Robert T]

Somewhere in his book, Ellis summarized it well by saying "The hardest work in investing is not intellectual, but emotional."

Here's the passage from the book.

• “The biggest challenge is neither visible nor measurable; it is hidden in the emotional incapacities of each of us as investors. Investing, like parenting teenagers, benefits from calm, patient persistence and a long-term perspective and constancy to purpose. That’s why “know thyself” is the cardinal rule in investing. The hardest work in investing is not intellectual; it’s emotional. Being rational in an emotional environment is not easy, particularly with Mr. Market always trying to trick you into making changes. The hardest work is not figuring out the optimal investment policy; it’s sustaining a long-term focus - particularly at market highs or market lows - and staying committed to your optimal investment policy.”

[Riprap]

I would love to hear what Bogleheads have to say regarding Ellis' thoughts on investing for a legacy especially in light of the destructive effects of inflation.

From the beginning of Chapter 18 in the fifth edition Ellis says,

"Yes, Death is every individual's ultimate reality, but as an investor, you may well be making too much of it. If, for example, you plan to leave most of your capital in bequests to your children, the appropriate 'time horizon' for your family investment policy - even if your are well into your seventies or eighties - may be so long term thay you'd be correct to ignore investment conventions such as 'older people should invest in bonds for higher income and greater safety or to determine the percentage of your assets you should have in stocks, subtract your age from 100.'
The wiser, better decision for you and your family might be to invest 100 percent in equities becasue your 'investing horizon' is far longer than your 'living horizon'"

This seems to contradict Swedroe's "need, willingness, and ability" advice. It also seems to run counter to Bernstiens' Liability Matching Portfolio (LMP) from his recent "The Ages of the Investor" ebook. It also runs against Benjamin Graham's boundaries of not less than 25% and more no than 75% in equities.

If one's withdrawal rate is low enough, Jim Otar's perpetual distribution whitepaper seems to support Ellis.

I acknowledge the psychological difficulties that can be expected from a prolonged and severe market decline. Whether leaving a large estate to heirs is appropriate or not is a discussion for another day.

Any thoughts?

[Random Walker]

I agree that Ellis' book is one of the very best and not talked about enough here. As I've said before, each time I read this book my conviction for my aggressive 80/20 AA is strengthened. He really emphasizes the effect of inflation over time. And as Walt above says, he makes a person consider an investing timespan possibly longer than an individual's lifespan.
I also like that he emphasizes that it is a Loser's game because of the fierce competition between bright, motivated, hard working individuals.

Dave

[Beagler]

Based on the comments here I went to a local bookstore and read it today. A quick read, very basic: indexing 101. IMHO any of Rick's or Larry's books are better, and Dr. Bill's are more entertainingly-written.

[rj49]

I also recommend his "The Elements of Investing", co-authored with Burton Malkiel. In the book Ellis advocates a two-fund portfolio, the Total World index and Total Bond, with a high allocation to stocks. Here's an article for his suggested allocations and rationale behind it:

http://www.kiplinger.com/columns/fundwa ... folio.html

[Rodc]

This seems to contradict Swedroe's "need, willingness, and ability" advice. It also seems to run counter to Bernstiens' Liability Matching Portfolio (LMP) from his recent "The Ages of the Investor" ebook. It also runs against Benjamin Graham's boundaries of not less than 25% and more no than 75% in equities.

I don't think there is a contradiction here. If your horizon is many decades (life of your grandchildren for example) you may have huge willingness and ability to take risks (need is neither here nor there as far as I can tell, and is by far the weakest leg of Larry's three legs at any rate). Liability matching does not even come into play in this case as when leaving a long term legacy there is no particular liability to match (unlike funding a retirement with many liabilities)

Basically a long term trust fund is simply a very different game than Larry or Bill are discussing.