05: Winning the Loser's Game

Winning the Loser's Game

Charles Ellis

The fifth book in the Investing Book Highlights series is Winning the Loser's Game by Charles Ellis. This book delivers timeless strategies for successful investing. Ellis offers critical information about how most investors can outperform the market for steady, long-term gains.

Winning the Loser's Game via YouTube


TOP TEN JOTS

10. The loser's game

• The loser's game outcome is determined by the mistakes made by the loser.
• "The basic assumption that many institutional investors can outperform today’s market is false" states Ellis. 
• The competition between institutional investors means that it is very difficult to outperform each other not to mention the market especially when taking in the cost of active management fees.
• Most individual investors have even less of a chance of out-performance given the opposition they are against.

9. Over the very long run, the market can be almost boringly reliable and predictable.

• Ellis' emphasizes, " Mr. Market’s very short-term distractions can trick us and confuse our thinking about investments."
• Mr. Value who works all day and all night inventing, making, and distributing goods and services always prevails in the long run.
• Sustaining a long-term focus will help investors weather Mr. Market's volatility and ride the tailcoats of the market.

8.  Few if any major investment organizations will outperform the market over long periods.

• Ellis' surmises, "Given the intensity and skill of the competition, superior knowledge is exceedingly rare."
• Using an index fund allows individual investors to capture market like gains without any effort.
• Successful active fund managers are impossible or extremely difficult to identify.
• Look at the reproduced chart from Ellis' Winning the Loser's Game: Very few (active) mutual funds (or ETFs) outperform the market over the long term

7. Time is crucial to any successful investment program.

• "The longer the time period over which investments are held, the closer the actual returns in a portfolio will come to the expected average. " states Ellis.
• Look at the chart from Ellis' Winning the Loser's Game: Range of returns of stocks, bonds, and “cash” after adjusting for inflation.

• As can be implied from the chart, the consistency of the rate of returns increases through longer time periods with stocks gaining an advantage over bonds and cash.

6. The great power of regression to the mean.

• Individual investor should realize that winning streaks end and normality eventually returns.
• Markets often overreact to recent good news and to recent bad news.
• "We suffer from an illusion of control and underestimate the odds of bad events—particularly very bad events." claims Ellis.
• Ellis also imparts this wisdom, "If stocks return an average of 10 percent per year, how often over the past 75 years did stocks actually return 10 percent? Just once, in 1968."

5. There are two major categories of risk in investing. One is investment risk; the other is investor risk.

• Investment risk is the serious permanent loss of capital.
• Investor risk is that investors are not always rational and do not always act in their own best interests.
• Controlling both risk can be done by establishing long-term goals and setting up an asset allocation that suits your risk tolerance.

4.  Inflation relentlessly destroys purchasing power almost as rapidly as economic gains build wealth.

• From 1900 to 2012 the purchasing power of $100.00 shrank to about $3.48 due to the corrosive power of inflation.
• Ellis points out that from 1926-2000, " Before adjusting for inflation, T-bills never lose and stocks are negative 30 percent of the time, but after adjusting for inflation, T-bills and stocks both have negative returns 35 percent of the time. "
• Taxes and Inflation, sometimes known as "fiscal pirates", are a given for investors but inflation is the larger pirate due to its cumulative effect.

3.  Market timing

• Ellis emphatically states, "Market timing is a truly wicked idea. Don’t try it—ever." 
• Being out of the market during a market recovery will lead to missing the substantial recovery gains.
• Investor lose money relative to a simple buy-and-hold strategy by being out of the market part of the time.
• Look at the following graphs from Business Insider: How Missing a Few Days Would Hurt Returns

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

• A 5-year horizon usually calls for a 60:40 ratio of equities to fixed income. A 10-year horizon usually leads to an 80:20 ratio. A 15-year horizon typically results in a 90:10 ratio. 
• "Common stocks have average returns that are higher than those of bonds. Bonds in turn have higher returns than short-term money market instruments." states Ellis.
• Look at the chart from ChartSource®: Long-term value of equities and bonds compared to inflation. What would you like to invest in for the long-term?

1.   The winner's game

• Investors must establish and abide by long-term investing objectives with the right amount of risk.
• Investors who try for low turnover and few changes in investments have the best chance of beating the market.
• Knowing that effective investments take time and learning the complexities of the market can help investors by having them overlook extreme market volatility and therefore reward patience.

What do you think of Ellis' ideas? Please comment below. If you have already read it, please let me know which were the most important for you.