Winning the Loser’s Game
Long-time readers of this blog may recognize that this post title has appeared here before. That’s because I’m reviewing the sixth edition of Charles D. Ellis’s excellent investing book Winning the Loser’s Game, and I reviewed the fifth edition a few years back. I was pleased to reread the familiar parts and see the new material written in Ellis’s clear and convincing style.
The main message of this book is that trying to beat the market is a loser’s game because “professional investors are so talented, numerous, and so dedicated to their work that as a group they make it very difficult for any one of their number—and virtually impossible for amateur investors—to do significantly better than others, particularly in the long run.”
Some accuse mutual fund managers of being unable to beat their benchmarks because of various failings such as having a short-term focus. Ellis says that the real reason mutual fund managers can’t get an edge is because they and other professional investors are all so talented that there aren’t enough poor traders to exploit. Because “institutions do over 95 percent of all exchange trades,” there aren’t enough amateur investors to exploit either.
I won’t repeat the material from my review of the fifth edition except to say that of the two typos I found in the fifth edition, only one was corrected. Table 17.1 on page 142 of the sixth edition still has inflation percentages ranging from 2% to 6% when they should range from 3% to 7%.
In one of the new chapters for the sixth edition, Ellis has an interesting take on how we measure management fees. “When stated as a percentage of assets, average fees do look low.” But “investors already own their assets.” Fees should be expressed as a percentage of “incremental returns over the market index.” Viewed this way, typical fees “are over 100%.” This means that fees exceed the value that mutual funds provide.
This is definitely a book I wish I’d read back when I was just starting out as an investor. Perhaps I could have avoided some expensive mistakes. I highly recommend that thoughtful investors give this book a read.
The main message of this book is that trying to beat the market is a loser’s game because “professional investors are so talented, numerous, and so dedicated to their work that as a group they make it very difficult for any one of their number—and virtually impossible for amateur investors—to do significantly better than others, particularly in the long run.”
Some accuse mutual fund managers of being unable to beat their benchmarks because of various failings such as having a short-term focus. Ellis says that the real reason mutual fund managers can’t get an edge is because they and other professional investors are all so talented that there aren’t enough poor traders to exploit. Because “institutions do over 95 percent of all exchange trades,” there aren’t enough amateur investors to exploit either.
I won’t repeat the material from my review of the fifth edition except to say that of the two typos I found in the fifth edition, only one was corrected. Table 17.1 on page 142 of the sixth edition still has inflation percentages ranging from 2% to 6% when they should range from 3% to 7%.
In one of the new chapters for the sixth edition, Ellis has an interesting take on how we measure management fees. “When stated as a percentage of assets, average fees do look low.” But “investors already own their assets.” Fees should be expressed as a percentage of “incremental returns over the market index.” Viewed this way, typical fees “are over 100%.” This means that fees exceed the value that mutual funds provide.
This is definitely a book I wish I’d read back when I was just starting out as an investor. Perhaps I could have avoided some expensive mistakes. I highly recommend that thoughtful investors give this book a read.
Good one - Fees should be expressed as a percentage of “incremental returns over the market index.” Earlier I tried to find an adviser who would take a fee as a percentage of my profit, forget the profit over index. No such luck. That's what's got me thinking about their value.
ReplyDeleteMarkets do not create value, they only redistribute it from weak (by definition) amateurs to better equipped and informed professionals.
@AnatoliN: I've never heard of an advisor who takes only a slice of your returns, but maybe they exist somewhere.
DeleteAccording to Ellis, amateurs make less than 5% of trades, which leaves slim pickings for the professionals. Mostly the pros have to try to beat each other, a very difficult game considering that the bad pros tend to get forced into other occupations.
MJoM - What an appropriate book given my comments on another blog. I guess I will have to check it out. Also nice to find out you are a math guy - I'm a retired reliability/quality engineer, so bred from similar cloths - Cheers, and I look forward to reading more of your blog. - Phil
ReplyDelete@Phil: I'm always happy to have a new reader. You can take a poke into my archive of posts to see what I have to offer.
DeleteThe problem with reporting fees as even something so simple as (fees this year/profit this year)*100 is that you can't divide by zero....
ReplyDeleteSounds like a book worth looking for. Thanks for the tip!
@Bet Crooks: Good one. I'd be OK with reporting fees as infinite.
Delete