I had the opportunity recently to read Charley Ellis’s Winning The Loser’s Game. This is an investment classic and should be required reading for anyone who is either picking their own stocks or trying to pick a winning actively managed mutual fund manager.  If you’re already convinced that using index funds is a better idea than either of those, you’re not going to get much out of this book, other than some reinforcement of your views, a better ability to stay the course in a downturn, and a lot of great quotes. However, this book is Bill McNabb’s (CEO of Vanguard) favorite investment book for a reason and is often referred to by other Boglehead authors.  It was first published in 1998, but the sixth edition, published in 2013, reads like it was just written, and includes lots of references to the Global Financial Crisis and events that have occurred since.

The Loser’s Game


The basic premise of the book is that 50 or 60 years ago investing in the stock market was a winner’s game.  90% of the participants were individual investors and someone who was willing to take the time and effort to really study what they were doing could earn market-beating returns. However, since that time professional investors have become so numerous, so skilled, and so tech savvy that they now make up 90% of the market.  Now when you trade stocks, mutual funds, or ETFs, you are almost surely trading with a professional who spends 60-80 hours a week doing something you may do once a month. It isn’t that active mutual fund managers suck at what they do at.  It’s that they’re entirely too good at it and there are too many of them for any of them to win. It has changed from a winner’s game to a loser’s game. A loser’s game is like amateur tennis, where the winner is the one who makes the fewest mistakes.  If you can just volley the ball back to your opponent, eventually your opponent will hit it out of bounds or into the net.  On the other hand, if you try to smash a shot and crush your opponent (like the pros do), you’re much more likely to hit the ball into the net yourself. The way you win a loser’s game is to not play.  The way you avoid playing the stock market game (trying to beat the market) is to simply avoid going into “the casino” and just own the entire market at the lowest possible cost.  You do that by purchasing index funds and spending your life energy on something else.

Some Great Quotes

Charles D. Ellis

Charles D. Ellis

Here are some quotes from the book to give you a flavor for it:

Sensible investors rely on themselves. A strategy of professing ignorance and handing assets to a trained professional invites failure….Ironically, upon acquiring sufficient information to assess the skill of an investment service provider, individuals end up empowered to take control of their portfolios and make their own decisions.

Over the past decade index funds beat the results of 80 percent of mutual funds….After adjusting the comparison of index funds to actively managed funds for survivorship bias, taxes, and loads, the dominance of index funds reaches insurmountable proportions.

For all its amazing complexity, the field of investment management really has only two major parts. One is the profession–doing what is best for investment clients–and the other is the business–doing what is best for investment managers. As in other professions, such as law, medicine, architecture, and management consulting, there is a continuing struggle between the values of the profession and the economics of the business. Investment firms much be successful at both to retain the trust of clients and to maintain a viable business, and in the long run, the latter depends on the former. Investment management differs from many other professions in one most unfortunate way: it is losing the struggle to put professional values and responsibilities first and business objectives second.

Over the past 20 years, more than four out of five of the pros got beaten by the market averages.  For individuals, the grim reality is far worse.

Of course, most professional investment managers would have good performance–comfortably better than the market averages–if they could eliminate a few “disappointing” investments or a few “difficult” periods in the market. (And most teenagers would have fine driving records if they could expunge a few “surprises.”)

Investing is not entertainment–it’s a responsibility–and investing is not supposed to be fun or “interesting.”

Benign neglect is, for most investors, the secret of long-term success….The hardest work in investing is not intellectual; it’s emotional….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.

A small boat sailor can do little to change the wind or tide but can do a lot by selecting the right course, keeping sales well trimmed and by knowing what he and his boat can do in heavy weather and watching for the signs to avoid serious storms.  Similarly, the investor can work with the markets to achieve his or her realistic objectives, but must not take on more risk of heavy weather or possible market movements beyond his capacity to sustain commitments until the market storms have passed.

If you don’t know who you are, the stock market is an expensive place to find out.

While investment counseling is more important to long-term success than managing investment portfolios–and could make far more of an economic difference over the long term–most investors will neither do the disciplined work of formulating sound long-term investment policies for themselves nor pay the modest fees for investment counseling–the more important service.

For most investment managers, portfolio management is neither an art nor a science. It is instead an unusual problem in engineering, determining the most reliable and efficient way to reach a specified goal, given a set of policy constraints, and working within a remarkably uncertain, probabilistic, and always changing world of partial information and misinformation, all filtered through the inexact screen of human interpretation.

Investing in stocks helps keep us young.

If you must play the market to satisfy an emotional itch, recognize that you are gambling on your ability to beat the pros. So limit the amounts you play with to the same amounts you would gamble with the pros at Las Vegas. (keep accurate records of your results and you’ll soon persuade yourself to quit.)

Don’t get confused about stockbrokers and mutual fund salespeople. They are usually very nice people, but their job is not to make money for you. Their job is to make money from you.

Two Great Insights

David Denniston Ad 1There were a couple of particularly profound insights in the book.  The first is a list of errors investors make. These include:

  1. Trying too hard (trying to beat the market)
  2. Not trying hard enough (not taking on enough risk)
  3. Being impatient (good investing is boring investing)
  4. Changing the mutual funds you own in less than 10 years
  5. Borrowing too much
  6. Being naively optimistic
  7. Being proud
  8. Being emotional

The second was a chart in Chapter 20 entitled “What it will take to get to there from here.” This chart has your current savings on the Y axis, your age and nest egg goal across X axis, and the values in the chart are “How much you need to save annually.” I thought it was a particularly good presentation of the benefits of starting early. Although he uses a rather optimistic 10% return for the chart, he points out that if you’re 45, expect to need $1.4 Million to retire, and already have $250,000, you’re done saving for retirement. Likewise if you’re 25 and have $100K and expect to need $3 Million in retirement, you’re also done. On the other hand, if you’re 55 and expect to need $940,000 to retire, you need to save $59,000 per year to get there. Perhaps I’ll recreate the chart using 5% real returns and use it for a post some time.

The One Thing I Learned

Given that I’ve read dozens and dozens of similar books, it is very rare that I truly learn more than one or two new things about personal finance or investing while reading them.  The law of diminishing returns and all that.  The thing I never really knew before reading this book was an additional benefit of donating tax-deferred accounts to charity at your death. Not only do you get to avoid the income taxes (Uncle Sam’s portion) and the estate taxes due on that money, but you get the additional decrease in the size of your estate by donating Uncle Sam’s portion of that account. I had never really considered that before. So if you have an estate tax problem, give the heirs the Roth and the taxable account, and give the tax-deferred accounts to charity.  I’ll probably never have that issue, but some of you will.

A Criticism


Charley Ellis is a big fan of the 100% stock portfolio.  While it is most likely that a 100% stock portfolio will be the highest performing portfolio, behavioral issues prevent that from being the highest performing portfolio for most individuals. I think he could have spent a little more time discussing the merits of bonds in the book. It reads a little too much like Stocks For The Long Run in that respect.

All that said, it’s a fantastic book.  If you haven’t already read a half dozen books on the same subject, I highly recommend it. Buy your copy of Winning The Loser’s Game today!

Have you read it?  What did you think?  Comment below!