Customer Reviews

Winning the Loser's Game: Timeless Strategies for Successful Investing

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This book is based on a famous article written by Mr. Ellis in 1975, "The Loser's Game," that showed why professional money managers are unable to beat the market averages in 90 percent of the cases. In fact, the harder they try, the more likely they are to lose by increasing trading costs and mistiming their trades. The first two editions of this book were aimed at providing solutions to that dilemma for professional money managers. Mr. Ellis provides consulting advice to such professional money managers, and is in a good position to know what he is talking about. This edition is aimed at the needs of the neophyte individual investor. It is especially timely as we near the end of 2 decades of almost continual bull markets for equities.

The beauty of this book is that it is simple and easy to understand. Ellis designed it for anyone who has a genuine interest in getting good investment results, is willing to develop an appreciation for market fundamental, and has the discipline to pick an approach and stick to it.

In various chapters, the book describes why professionals do so poorly, and how the individual can have the same problems if not careful.

The key points of the book are that you need to establish your long-term investment objectives in writing, and with the expert advice of professionals, determine a well-reasoned and realistic set of investment plans that can help you achieve your objectives. You should set your asset mix at the highest ratio of equities you can afford financially and emotionally for the long-term. However you do this, don't try to beat the market. That's a loser's game. He emphasizes not making mistakes, not losing money relative to the market, staying in the market, and realizing that your real problem is beating inflation rather than the market. In general, doing less will be doing more. Avoid speculations, shifting funds continuously, and paying too much attention to near-term performance.

A good companion book for this one is John Bogle's recent one, Common Sense on Mutual Funds, that articulates many of Ellis' points in more detail and more graphically. As a historical note, Bogle writes in his preface to Ellis' book that he was inspired by Ellis' original article to make Vanguard's first indexed mutual fund in 1975.

In thinking about the advice here, I'm not sure that everyone needs professional advice to come out in the right direction. If you decide that you primarily want to pursue indexed mutual funds, there is little need for advice, for example. But if you do opt for advice, be sure you watch out for vested interests in the person giving the advice.

Also, the book doesn't do enough to address the conflicted feelings that people have about money. If you don't address those, you won't carry through on your discipline. I suggest that you read any of the excellent books on that subject and do the exercises in them.

I also suggest you find the calmest, sanest person you know who is good with investments (but is not an investment professional) and ask them to review how you are doing annually. This will help you keep your discipline. A parent, spouse, or good friend could be an appropriate choice for this role. Share this book with them first, so they will know what you are trying to do. Then explains your ideas, and spell them out on paper. Chances are you will outdo what you would otherwise accomplish.

Good luck in outperforming inflation!

Donald Mitchell

Coauthor of The Irresistible Growth Enterprise and The 2,000 Percent Solution

(donmitch@fastforward400.com)

Actually all the information in this book can summarized into a short paragraph (read this and skip the book):

You can never beat the market so invest in index funds. In the long run Taxes and Inflation will erode your investments and only stocks can safeguard you against it, so invest in index funds which have low taxes. Think long term (20+) years. Short term you will lose money so invest in index funds and dont go checking the stock quotes every day, or even every year. And did i mention index funds :)

"Winning the Loser's Game" is a bit of a mess on several fronts. It primarily fails due to the ill conceived idea and sloppy execution of updating a book originally written for the institutional investor to also address the individual investor. In theory this should have been possible but neither Mr. Ellis nor his editors have invested the necessary effort to do a credible job. Advice for the individual investor is bolted on pretty much at random, with at times hilarious results. For example, the "Managing the Manager" chapter is filled with advice on setting a useful agenda for your quarterly meeting with your investment advisor organization (including criteria for deciding when to fire a portfolio manager!), and the role your investment committee should play in modifying your investment policy. In the same breath, Ellis also advises the individual investor in search of an investment vehicle to check with their employer's pension manager for the names of a few well respected mutual fund companies, for example, Vanguard and American Funds. In short, the entire chapter is for the institutional investor with the exception of this single paragraph on how to find a good mutual fund. Even at that, the advice is laughable. (I'm sure we are all on a first name basis with our employer's pension fund manager.....) This unsuccessful attempt to modify the book for the individual investor continues throughout. Even when Ellis directly discusses the individual investor we discover he is primarily concerned with that class of individual investor with "significant assets", that is, for investors who have retained advisors; not your garden variety working stiff saving for retirement. And certainly, Ellis's notion of a financial "end game" consists not in the asset allocation shifts necessary when approaching, and in retirement, to insure that limited resources last throughout retirement, but rather in deciding how to best allocate one's estate at death: e.g. establishing scholarships, funding the arts, avoiding estate taxes, etc.

Mr. Ellis's sloppy handling of data is inexcusable, particularly for someone in a profession that presupposes competence with numbers and accurate (preferably also lucid and cogent) presentation of data. In the book's preface Ellis profusely thanks his editor Dero Saunders, and notes that Mr. Saunders "expects to be remembered as the editor who could remove four lines from the Lord's Prayer without anyone noticing". There is substantial evidence that to create this impression Mr. Saunders (and Mr. Ellis) intended to rely more on their reader's lack of perception than on their editorial skill. The book includes many, many, errors that are, I assume, the result of haphazardly updating text and tables from previous editions. Very often the figures in the text do not match the data in the corresponding graph or table, and vice versa (e.g,. see pages 5, 10-11, 33-34, 40-41, etc.), but in some cases the errors are just due to sloppy writing and proof-reading. For example, on page 33 we learn that since 1901, annual investment returns have ranged from at best 4%(yikes!) to at worst minus37.4%. Neither number, in particular the 4% number (thankfully), match the figures in the corresponding table on the next page. However, on page 40 we learn that that "over the past 50 years the actual returns have been between a loss of 43 percent and a gain of 54 percent". The accompanying footnote unhelpfully informs us that these numbers are "normal" while the numbers on page 33-34 are adjusted for inflation. How a loss of 43 % becomes a loss of 37.4% after adjusting for inflation is a bit of mathematical mystery.

The preceding examples were simply oversights and negligence. However, on page 123 Ellis simply misuses his data as he asserts that "over the long, long term" common stocks have provided real returns of 4 ½%. His version of the long, long, term is 1965 to 1994. (Then again, on page 42 he asserts the long term return for stocks is 6.1%, however, the data he references on page 41 computes to a 6.7% return, so I have no idea where he got the 6.1% number. Never mind....) I don't have any reason to doubt the 4 1/2 % return number for the particular 30yr period measured, and surely it would be a good thing to remind folks that it is very possible to have a significantly below average return over a lifetime of investing, but to represent 4 ½% as the long term average real return for common stocks in the US is simply wrong. [For what it is worth, Ibbotson and Brinson assert 6.7% (1940-1990) and John Bogle asserts 7.2% (1926-1997).]

In my opinion, Mr. Ellis is simply milking his very good 1975 article in the Financial Analyst's Journal (as he reminds us, "it won the profession's highest award".). In "Winning the Loser's Game" he recycles his argument, bolsters it with sloppily assembled data, and provides poorly organized advice to the investor on how to act on his argument. Much of the advice is undoubtedly true, but nevertheless, the book is poorly organized, highly repetitive, and a real grab bag of financial aphorisms, lacking the structure and clarity to give the interested reader anything to think through on their own. But then, this is I suspect, the real problem. In Mr. Ellis's estimation the individual investor is not capable of managing his or her finances alone, and they are advised to spend $10,000 to $20,000 every ten years for investment counseling and estate planning.

If you are interested in a good treatment of market efficiency, the nature of risk, and a rational framework for estimating future returns, and the relationship of asset allocation to risk, you would be much better off with Burton Malkiel's "A Random Walk Down Wall Street" and William Bernstein's "The Intelligent Asset Allocator".

This could have been a good book in that the author has some very valid points. However both he and the editors at McGraw-Hill were quite lazy.

The book was originally written in 1985 with a target audience of professional investment managers and their large clients, such as pension funds and endowments. This 1998 edition was purportedly written for individual investors. Quite frankly, other than chapter 14, "The Individual Investor", it would be hard to tell that there was a change. Even this chapter is repetitive of previous material, including some of the same quotes.

The book is also padded beyond tolerance... in-page large-type quotes from the material in the chapter, numerous blank pages (30, 58, 70, 82, 112, 126, & 134), the same information recast as different tables & charts, and it still only manages to come to 137 pages. It's not clear why McGraw-Hill thinks it's worth [so much]. It's basically a long magazine article.

In addition, my experience is that McGraw-Hills editors have a real editorial quality control problem and it's most egregious in this book in the footnotes. For example: on page 40 the text refers to the "real" risk-free return as being before inflation and then the footnote to that text refers to "real" as being after being corrected for inflation; on page 55 the footnote purports to explain how 1.4 percentage points was calculated viz: "1.2 x 7 percent return on equities over and above the risk-free rate of return = 1.4 percent incremental return." (huh?); and (a nitpick, I know, but indicitive of their sloppiness) chapter 12 has two footnotes #3.

The author states that the book was written over an extended period in a social club in London and hotels and flights between Johannesburg, San Francisco, Chicago, Nairobi, Princeton, Maine, Bermuda, Vail, Boston, New York City, Atlanta, and his home. Perhaps if he had stayed in one spot it wouldn't have been so disjoint. The buying public deserves better.

As someone just beginning to read books about finance and investment, I found this book interesting but repetitive. Perhaps it is important to keep drumming in the same messages: (1) the odds of beating the market by timing purchases of individual stocks are very low; (2) the asset allocation of your portfolio has more impact on your ultimate success than which stocks (mutual funds, whatever) you choose. While I did find the arguments compelling, I also heard them the first time and didn't need to see them again on every page. Fortunately, the book is short (certainly price per page quite high), therefore the repetition comes to an end before too long.

I found this book to be very helpful-one of the best financial books I have ever read. The book is written so that someone who has recently begun investing can pick up the majority of the concepts, while not boring the more seasoned investor.

One of the more interesting topics that this book covered was the discussion on risk. Mr. Ellis' opinion is that most investors should focus most on risk instead of historical returns-as it is more useful yardstick for measuring your portfolio. As in many other books, he focusing on minimizing expense ratios, investing in index mutual funds, and focusing on long-term goals. Includes an excellent section on the impact of inflation on your portfolio. In the era of day trading and individual investors expecting 25% rates of return I found this book refreshing and realistic.

This book stresses one of the most important "secrets" to long term investing success, that of not losing money on a particular investment. Warren Buffet also stresses this with his two rules of investing (rule number one, never lose money, rule number two, never forget rule number one). Many people think that's a big joke. They don't believe it can be done, and they believe it's worth losing money in search of a huge gain on an investment. Well, it can be done by buying and holding index funds, keeping the self-managed part of your portfolio down to a minimum, and staying away from speculative investments, though what's speculative is in the eye of the beholder. Permanent loss of capital is the single worst thing that can happen to your portfolio. It should be avoided at all costs. Just figure out what that capital could have grown to in an index fund for 20-30 years and you'll see what I mean. This book will help you see that, and contains much other useful information. It really will improve your results, and actually will reduce your time and effort you put into investing, as well as your stress level.

Charles Ellis takes as his premise the applicability of the Efficient Markets Hypothesis, not as a dogma, nor even necessarily as an explanatory model, but as an immensely powerful prescriptive model. Financial markets are *highly* efficient, and it is exceptionally difficult to identify opportunities for arbitrage (riskless profit) within them. For the individual, retail investor the best course by far is to accept that investing is what Ellis calls "a loser's game". By this he means that - in his own analogy - successful investing is more like amateur tennis than professional tennis: in professional tennis the winner is the one who has the best technique and the greatest skill; in amateur tennis, the winner is the one who makes fewest mistakes. Investing ought to start with the axiom that managing risk (which is what drives investment returns) is immeasurably more important than seeking market inefficiencies (if such exist), while trading on 'tips' is an almost guaranteed way to make yourself poorer.

Ellis explains in non-technical but never simplistic language the essentials of a rational approach to portfolio construction and management. He has a particular gift for explaining highly abstruse notions in modern portfolio theory and making them sound like common sense. This is a necessary and important book in a field plagued by charlatans. I recommend to anyone seeking to maximise his wealth over the long run.

This seems to be a book made out of an old but important magazine article. The target audience shifts between chapters, pages are left blank and unnecessary space is spent on charts. However, a useful analogy and deflating historical analysis make the point cleanly that passive investing in stock/bond funds is preferable to active mutual funds. And don't be tempted by picking stocks yourself.

Better values in the "passive" school of investing lie elsewhere, such as in Malkiel's "random walk" book.

Contrary to popular belief, this is not a book for insitutional investors...or individual investors. This is a book for every type of investor out there, and those who aim to correct their mistakes and start indexing their portfolio, because it's nearly impossible to beat the market, especially on a consistent basis. Ellis is one of Wall Street's great minds and his strong, fundmanetal-based ideas are relayed into this book. This is truly an investment classic for every serious investor.