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Review of "Winning the Loser’s Game: Timeless Strategies for Successful Investing" by

Simple and clear guidance on how to think about investing over your whole lifetime.


1 February 2021

This is a review of the Fifth Edition, which I bought in 2012 but only read around 2018 after it was highly recommended in another book.

The book is now in its Seventh Edition.

The author

Wikipedia has a detailed profile of Charles Ellis.

The foreword by David F Swensen, Chief Investment Officer of Yale University gives his personal perspective:

“Charley Ellis sets the standard. In the late 1980s, several years after I took responsibility for managing Yale’s endowment, I met Charley when he addressed a group of T Rowe Price’s investors at a meeting in Baltimore. Although I remember little else of that day – it was more than 20 years ago, after all – I vividly recall Charley telling us about the importance of his life-changing experiences at Phillips Exeter, Yale, and Harvard. As I heard him speak of his love for education, I knew I needed to know Charley.

In 1992, Charley joined Yale’s investment committee. My colleagues and I eagerly anticipated his contributions to our meetings. We were never disappointed. Charley always advised gently, more often than not with superbly crafted stories (or Charley’s parables, as we called them). Charley advanced Yale’s interests in a manner that mattered immediately and resonated even more deeply as time passed. As just reward for his outstanding service, Charley took over the chair of Yale’s investment committee in 1999.

When Charley joined the investment committee in 1992, Yale’s fund stood just short of $3 billion. 16 years later, when he retired, Yale’s assets totalled nearly $23 billion. To commemorate Charley’s contributions to Yale’s investment efforts, the investments office presented him with a calligraphic document, illuminated with Exeter silver, Yale blue, and Harvard Crimson, thus closing the circle that began two decades earlier. Charley Ellis sets the standard.”

Overview of the book

The book is quite short comprising only 234 pages including the Appendices and Index. There are 23 short chapters, as the author covers a large amount of ground in the book, as you can see from the list below:

Foreword (by David F. Swensen)
Preface (by the author)

  1. The Loser’s Game
  2. Beating the Market
  3. Mr Market and Mr Value
  4. The Investor’s Dream Team
  5. Investor Risk
  6. Your Unfair Competitive Advantage
  7. The Paradox
  8. Time
  9. Returns
  10. Investment Risks
  11. Building Portfolios
  12. Why Policy Matters
  13. The Winner’s Game
  14. Performance Measurement
  15. Predicting the Market – Roughly
  16. The Individual Investor
  17. Selecting Funds
  18. Planning Your Play
  19. Disaster – Again
  20. Endgame
  21. Thoughts for the Wealthy
  22. You Are Now Good to Go!
  23. Parting Thoughts

Appendix A: Serving on an Investment Committee
Appendix B: Recommended Reading

This is a very wide-ranging book which sets out a clear strategy for the individual investor, and addresses the key behavioural issues investors need to face up to.

I have selected just a few snippets in the extracts below.

Foreword (by David F. Swensen)

In the section “A Sorry Tale” Swensen explains something which many investors are unaware of. The average performance of investors in mutual funds lags well behind the average performance of the underlying mutual funds themselves. This is shown year after year by studies carried out by firms such as Dalbar and Morningstar.

Swensen writes:

“The story of a fund manager with a much celebrated 15-year streak of beating the S&P 500 illustrates the problems with active management and investor behaviour. From the outset of his run on January 1, 1990, through its end on December 31, 2005, the hot-handed manager’s return of 16.5% per annum easily beat the S&P 500’s return of 11.5% per annum. So far, so good.

Unfortunately, all good things, including 15-year streaks, come to an end. From the beginning of 2006 to the end of 2008, the manager posted annual returns of -23.7% relative to -8.4% for the S&P 500. 15 fat years and three lean years produce an overall record of 8.6% per annum, measurably above the market return of 7.9% per annum.

Simple performance reports fail to capture the impact of these numbers on investor fortunes. At the inception of the extraordinary streak, funds under management amounted to only $800 million, exposing a relatively modest amount of investor assets to the beginning of the excitement. 15 years later, assets ballooned to $19.7 billion, placing the maximum level of investor funds at risk at the point of maximum bullishness. After three years of miserable performance and investor withdrawals, assets shrunk to a mere $4.3 billion.

Even though the simple time -weighted returns, as reported in fund offering documents and in fund advertisements, tell a story of modest market-beating results, dollar-weighted returns tell a different story. Taking into account investor cash flows, dollar -weighted returns fall short of the S&P 500 result by a margin of 7.0% per annum. Over the 18-year period that includes the 15-year streak and the three-year fall from grace, the once-celebrated fund manager destroyed a staggering $3.6 billion of value for his investors.

The story of the first hot, then ice-cold fund manager exemplifies the pathology of the mutual fund industry. On the way up, the fund management company and the press lionised the manager, attracting attention to the winning strategy. Investors respond by throwing bushels of money at the seemingly invincible stock picker. Assets under management and performance peak simultaneously. Investors suffer as performance deteriorates. The fund management company, the press, and the public turn their attention elsewhere, ignoring the embarrassment of the fallen hero. The fund management company gets paid. The fund manager gets paid. The investor pays.”

The Loser’s Game

In this chapter, the author is emphatic.

“Unhappily, the basic assumption that most institutional investors can outperform the market is false. The institutions are the market. They cannot, as a group, outperform themselves. In fact, given the cost of active management – fees, commissions, market impact of the transactions, and so forth – 85% of investment managers have and will continue over the long term to underperform the overall market.”

The author explains the difference between “A winner’s game” and “A loser’s game” by relating the statistical findings of Doctor Simon Ramo from observing games of professional and amateur tennis.

“In expert tennis the ultimate outcome is determined by the actions of the winner. Professional tennis players stroke the ball hard with laserlike precision through long and often exciting rallies until one player is able to drive the ball just out of reach or force the other player to make an error. These splendid players seldom make mistakes.

Amateur tennis, Ramo found, is almost entirely different. The outcome is determined by the loser. Here’s how. Brilliant shots, long and exciting rallies, and seemingly miraculous recoveries are few and far between. The ball is too often hit into the net or out of bounds, and double faults at service are not uncommon. Instead of trying to add power to our serve or hit closer to the line to win, we should concentrate on consistently getting the ball back. Amateurs seldom beat their opponents but instead beat themselves. The victor in this game of tennis gets a higher score because the opponent is losing even more points.”

As an amateur tennis player of very little skill, I can strongly attest to the above comments!

The author concludes this chapter with a positive message:

“The encouraging truth is that while most investors are doomed to lose if they play the loser’s game of trying to beat the market, every investor can be a long-term winner. All we need to do to be long-term winners is to reorient ourselves to concentrate on realistic long-term goal setting and staying the course with sensible investment policies that will achieve our own particular objectives by applying the self-discipline, patience, and fortitude required for persistent implementation. That’s what this book is all about: redefining the objective of the “game” and playing the true winner’s game.”

Beating the Market

A remarkable number of people believe that you can improve your investment performance by selling your shares when the market is high, and buying them back when the market is low.

Every expert investor I have ever read is categorical about the foolishness of this belief. The theory is great; the implementation is impossible.

In Figure 2.1, the author presents some data supplied by Cambridge Associates, covering the period 1980 – 2008 of the average annual compounded returns of:

  1. The S&P 500 over that period — 11.1%.
  2. The S&P 500 over that period excluding the 10 best days — 8.6%.
  3. … Excluding the 20 best days — 6.9%.
  4. … Excluding the 30 best days — 5.5%.

Excluding the 30 best days, which is 0.5% of the total period from 1980-2008, halves the achieved return. The author also includes more illustrations like this.

Investor Risk

This chapter contains one of the most important things I have learned about investment in my own 45 year career as an investor. You are your own worst enemy.

He starts:

“Pogo, that favourite folk philosopher, shrewdly observed an essential truth that has particular meaning for investors: “We have met the enemy and he is us.” So true!

In the same vein, George JW Goodman, writing as ‘Adam Smith,’ wisely explained, “if you don’t know who you are, the stock market is an expensive place to find out.” We are emotional because we are human. We believe that we’ll do better when we try harder. We find it hard to take advice such as, “If it ain’t broke, don’t fix it.” We are not even close to being entirely rational.”

The author is categorical about the risk of changing your mutual fund investments too frequently. By “too frequently” he means changing them more than than once a decade.

“If you’re doing this, you’re really just “dating.” Investing in mutual funds should be marital – for richer, for poorer, and so on; mutual fund decisions should be entered into soberly and advisedly and for the truly long-term.

Changing mutual fund assets costs investors heavily: The average return realised by mutual fund investors is sharply lower than the returns of the very funds they invest in because investors sell funds with recent disappointing performance and buy funds with recent superior performance.

As a result, they sell low and buy high, repeatedly scraping away a significant part of what they could have earned if they had only shown enough patience and persistence.”

That is exactly the same point made by David Swensen in the Foreword.

This is not something that I am guilty of. My wife and I own only one open-ended mutual fund (since I generally avoid open-ended funds.) The holding was acquired in 2012 and we presently have no expectations of selling it.

My preference in the case of collective investment schemes is to buy investment trusts, which is the UK terminology for a closed-ended mutual fund; in other words a fund where the investors cannot redeem their shares from the fund – they can only buy or sell their shares in the stock market. Some of our investment trust holdings date back to the 1990s.

Your Unfair Competitive Advantage

In this chapter, the author offers some very good advice on the danger of what is known as “home country bias.” I recently became aware that many individual investors who one would expect to know about it have not come across the concept.

He writes:

“Investors who decide to concentrate their investments in their home country are making an active decision to emphasise that one country over others. They may be right to do so if their home country has a large, complex, and dynamic economy like the United States and they have large financial obligations or responsibilities in that one country.

But before making such a decision, every investor should at least ponder the reality that most investors in most countries invest mostly in their home country. British investors concentrate investments in the United Kingdom. Canadian investors focus on Canada, Japanese investors on Japanese stocks, Australian investors on Aussie stocks, and New Zealanders on Kiwi stocks. Surely, they can’t all be right all the time even when most of their liabilities and spending responsibilities will be paid in their national currencies. If you woke up to find yourself a New Zealander or German, would you invest mostly in your home country? So why should an American?”

The Paradox

Throughout the book, the author stresses the importance of having an investment policy that is right for you. In this chapter, he has six questions which I have abridged and paraphrased:

1 What are the real risks to you from a bad outcome, particularly in the short run? Never take unacceptable risks.
2 How will you react emotionally to a bad experience? Know your emotional limits.
3 How much do you know about the realities of investing and financial markets? Lack of knowledge makes investors too cautious in bear markets and too confident in bull markets.
4 What other capital or income resources do you have? How much does your portfolio matter to your overall financial position?
5 Are there any legal restrictions on your investments? This can apply if you are investing trust funds or endowment funds.
6 What damage might unanticipated interim fluctuations in the portfolio do to your investment policy? Your policy should tell you what to do if there is a big market fall.

In my career as an investor, I have become acutely aware of my weaknesses. However, one important strength I have always had is that I can watch the entire portfolio fall in value very significantly without panicking. (I don't like the experience, but my stomach can take it!)

For example, between the high of May 2007 and the low of March 2009 our family’s portfolio made aggregate losses equal to 49% of the opening May 2007 value. I did no panic selling, and indeed was adding fresh savings from my income to the portfolio during that portfolio, despite watching it decline steadily, including losing money on my new investments.

I always advise investors to stay out of the market entirely if they cannot face watching their portfolio fall dramatically in value.

Why Policy Matters

As previously mentioned, the importance of having an investment policy is something the author comes back to again and again. He opens the chapter:

“The principal reason you should articulate your long-term investment policies explicitly and in writing is to protect your portfolio from yourself – helping you adhere to long-term policy when Mr Market makes current markets most distressing and your long-term investment policy suddenly seems most seriously in doubt.”

Later, he makes the same point that I do above:

“Most investors experience great anxiety over large-scale, sudden losses in portfolio value primarily because they have not been informed in advance that such events are how markets sometimes behave. Sharp losses are to be expected and even considered normal by those who have studied and understand the long history of stock markets.”

Typing the above words reminded me of some clients I had in the early 1980s at Arthur Andersen. They had sold their private company for a large amount of money. An investment bank had, perfectly sensibly, encouraged them to invest a sizeable chunk of the sale proceeds into a diversified portfolio.

When their portfolio fell by a percentage that I cannot remember but may have been around 25%, they felt very aggrieved because they had simply not appreciated that falls of that nature are commonplace in stock market investing.

In the last 15 years I have become increasingly rigorous about my investment policy and it is now built in to the Excel spreadsheet that I used to track our family’s portfolio. It is quite simple:

Cash and cash equivalents = 10% of (cash plus equity portfolio) subject to a minimum cash value of £X.

I designed the policy after reading a book on asset allocation and it has two fundamental goals:

  • The most important goal is that I should never need to sell equities for immediate spending money. There is nothing worse than having to sell shares at the bottom of the market because you are running out of cash. £X is sufficiently large to eliminate that risk in almost all circumstances. (Over time, cash will also arise from dividend income and sales of shares for investment reasons.)
  • Subject to cash always remaining above £X, the policy forces me to sell some shares when the portfolio rises in order to restore cash to 10%. Similarly, the policy forces me to buy some shares if the portfolio falls in value. For example, in February and March 2020 when stock markets fell sharply, I was buying shares with complete equanimity because that was what my investment policy required. I did not like seeing major falls in value any more than anyone else did, but they had no adverse effect on my behaviour.

Planning Your Play

This chapter helps you to think about your time horizon. The author points out that the appropriate time horizon for you may be very long even if you are relatively old:

“If, for example, you plan to leave most of your capital in bequests to your children, the appropriate “time horizon” for your family investment policy – even if you are well into your 70s or 80s – maybe so long-term that you’d be correct to ignore investment conventions such as “older people should invest in bonds for higher income and greater safety” or “to determine the percentage of your assets you should have in stocks, subtract your age from 100.”

The wiser, better decision for you and your family might be to invest 100% in equities because your “investing horizon” is far longer than your “living horizon.”

The author recommends thinking about the lifetimes of your children, potential grandchildren or charities whose lives of course may be infinite.

I certainly ignore my own chronological age in deciding on my investment policy which is reproduced above.

Thoughts for the Wealthy

Most readers may regard this chapter as not relevant to them. For example, the author points out that if you own $20 million (at the time the book was written) you are one of only 50,000 Americans.

However, he does have some sage advice for wealthier individuals.

Seeing the chapter again while writing this review reminds me that it is easy to underestimate how rich you can become from a simple policy of saving and investing. The secret is to start saving early, to invest sensibly, and to ensure that your spending increases more slowly than your earnings.

I have constructed a very simple Excel spreadsheet to illustrate the point. It allows you to change the variables as you wish. The spreadsheet when you download it contains the following figures:

  • Year one income £20,000
  • Year one expenditure £19,500
  • Income grows annually by 3%
  • Expenditure grows annually by 2%
  • Investment return of 5% per annum

Then after 50 years (age 70 if you started at age 20) the spreadsheet shows that you have £1.4 million.

The above figures are realistic post-inflation figures in my view, so the £1.4 million should be considered equivalent to “today’s money” and not some “inflated future money.”

Real life of course is never so simple or so smooth. The spreadsheet illustrates the importance of:

  1. Starting early, so your savings have a long time to grow.
  2. Restraining the growth of your spending compared with the growth of your income.
  3. Your earnings can grow steadily over the years if you keep adding to your skills and ability.
  4. Not dipping into your savings to spend them.
  5. Leaving your investments to grow without switching into cash. (In real life, investments go both up and down, but in the long term they go up more than they go down.)

Why the book matters

As explained on my page “My short reading list on investing” the decline of defined benefit pension schemes in the private sector means that you cannot ignore the question of how to save and invest.

I believe it matters more than your investment in your house.

Assessment of the book

Everyone should read this book before getting involved with investing. I list it 2 of the 5 books on my page "My short reading list on investing".

I personally do not follow all of his advice because market capitalisation weighted global index tracking funds are only a small part of my portfolio.

One reason is that investing is also a hobby for me, albeit a very serious one, and I cannot resist the challenge of trying to improve my performance as an investor.



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