Notes from Winning the Loser's Game by Charles Ellis

April 2006

Ben Casnocha


"Loser's Game" – Most professional investors don't outperform the S&P 500. So, best strategy for individuals is to play to not lose. Professional managers need to make a great return that beats S&P 500 and also make up for the associated fees.


Regression to the mean – in the long run consistent, superior returns from professional managers and mutual funds is extremely rare.


Beating the Market


Market timing – buying and selling stocks and bonds when it seems advantageous – because in the long run few managers are better on a repetitive basis. Long term holding guarantees the best, average returns.


Mr. Market and Mr. Value


In short run the stock market is fascinating and deceptive. In long run it's boringly reliable and predictable. Weather = short run, climate = long run. Hardest work in investing is not intellectual, it's emotional – staying rational in an emotional environment.


Investor's Dream Team


Index fund replicates the market, so you get Buffett, Soros, all the top managers, etc. Index funds over time outperform most experts. In long run, 85% of active managers fall short of the market. Lower feeds. Lower commissions and op expenses.




Time – the length of time investments will be held, the period of time over which investment results will be measured and judged – is the single most powerful factor in nay investment program.




A simple way to look ahead (investment outlook) is to appraise the likely change in two variables: long-term interest rates and corporate profits.


Three main asset classes – stocks, bonds, and bills.




Optimal level of market risk for a very long-term investor is moderately above the average. The longer you hold stocks, the less your risk and the surer your gain. The investor's best answer to short-term market riskiness is to ignore the interim fluctuations and be a long-term investor.


Why Policy Matters


You should articulate long term investment policy explicitly and in writing. You and investment manager should agree on these dimensions:

  1. The level of market risk to be taken
  2. Whether the level of risk is to be sustained or varied as the markets change
  3. Whether individual stock risk or group risk is to be taken or avoided and the incremental rate of return which such risks, when taken, are expected top reduce in the portfolio


Liquidity should not be given separate consideration in a well diversified portfolio. Even the largest equity portfolio could be liquidated in months.


Performance Measurement


If a long term investor, look at 10 year returns, don't get distracted by 2 or 5 year numbers.


Morningstar ratings usually are relative to all funds, not just a fund's legitimate peer group.


Managing Managers


Five levels of decisions for each investor to make:

  1. Asset mix – optimal proportion of equities, bonds, private equity, etc.
  2. Equity mix – proportions of different types of stocks (growth vs. value, large cap vs. small cap, etc)
  3. Active vs. Passive Management – appropriate method chosen for implementation of the "policy normal" mix of investments
  4. Specific manager selection
  5. Active portfolio management


The Individual Investor


Funds available for long-term investment will do best for the investor if they are invested in stocks and kept in stocks over time.


#1 maxim: Don't lose! Don't invest w/ borrowed money, take untoward risks, get caught up in rise and falls, etc.


Planning Your Play


Investing horizon may be longer than living horizon. Investment horizon should account for children's lives, too.


Inflation destroys wealth's purchasing power almost as rapidly as economic gains building wealth.


Eighty percent of a typical person's lifetime expenditures on health care are spent in the last six months of that person's life.


Inflation is a much bigger problem than taxes are. In real purchasing power, over 35 years, bonds were 20 percent ahead of the initial investment. T-bills behind the starting line by 20 percent. Need to consider inflation when budgeting how much money one needs to make to meet wealth goals.


Many people pay $10k per million dollars every year in brokerage commissions, advisory feeds, and other investment operating expenses╔yet are reticent at paying $10k once a decade for long term investment program counseling or an estate plan which can cost $20k.


Any funds that will stay invested for 10 years or longer should be in stocks. Funds invested for less than two or three years should be in "cash" or money market instruments.




Everyone should contribute maximum amount each year to IRA, for compounded interest and tax deferral.


You can give up to $10k without tax to each person you wish every year. Married couples can give $20k annually to each person. Future investment income is taxed on child's tax rate, so makes sense to do this earlier. This sidesteps the estate tax when you die.


If you are willing and able to make irrevocable decisions now regarding the long-term future disposition of your capital, you can save substantially on taxes.