Losers game download pdf

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McGraw-Hill has no responsibility for the content of any information accessed through the work. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. Contents Foreword Preface ix xvii 1. Beating the Market 14 3. Market and Mr. Value 27 4. Investor Risk 37 6.

Your Unfair Competitive Advantage 42 7. The Paradox 53 8. Time 60 9. Returns 65 Investment Risks 76 Building Portfolios 86 1 vii viii contents Why Policy Matters 91 Performance Measurement Predicting the Market—Roughly The Individual Investor Selecting Funds Planning your Play Disaster—Again EndGame Thoughts for the Wealthy You Are Now Good to Go! Take-charge investors both understand and execute their own investment programs.

When market participants follow this commonsense approach, investment results improve enormously. Well-informed investors sidestep the wealthdiminishing actions of following the crowd and avoid entirely the schemes of charlatans like Bernie Madoff.

Ever the wise coach, Charley counsels us to succeed by understanding ourselves and our investment alternatives. Do It Yourself Sensible investors rely on themselves. A strategy of professing ignorance and handing assets to a trained professional invites failure.

Education begins with reading. Each of these books outlines an easy-to-understand solution that could be distilled to two or three pages of prose. Why, then, do the books run hundreds of pages each? While it takes a short time to describe the conclusion, the bulk of the message provides the motivation for establishing a sensible program and the conviction for maintaining it through thick and thin. The idea of taking charge of an investment portfolio daunts many investors.

In fact, the correct solution involves pursuit of a basic, simple approach to markets that falls in the circle of competence of nearly everyone. Understand Your Investments Two types of investors inhabit the investment world—a vanishingly small group that makes high-quality active management decisions and a much larger group that commands neither the f or e w or d resources nor the training to produce market-beating results. Membership in the active management cohort requires full-time dedication to understanding and exploiting market opportunities.

Few qualify. Unfortunately, too many imagine that they possess active management skills, leading them to pursue costly strategies that all too predictably fail. The overwhelmingly large number of investors should seek membership in the passive management club.

Shockingly, investors experience even worse results than those that Charley reports. The pain for investors in failed mutual funds registers nowhere in an analysis of active funds.

Second, the performance data do not account for taxes. Third, a distressingly large number of investors pay loads front-end and deferred to brokers when they purchase mutual funds.

Because brokers impose these loads through a complex system of multiple share classes, they affect different classes of investors differently and do not appear in standard performance data. 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. As a result, at the end of , index funds accounted for only slightly more than 5 percent of mutual fund assets, leaving almost 95 percent of assets in the hands of wealth-destroying active managers.

In a rational world, the percentages would be reversed. Charley admonishes investors to avoid the game of security selection and to focus on the business of asset allocation. Serious academic research supports his point. Perhaps more important, asset allocation accounts for more than percent of returns for the community of investors, as the negative-sum games of security selection and market timing detract from aggregate returns.

Focus on asset allocation! Successful investors fashion investment programs that address their unique circumstances and preferences. Charley Ellis, mindful of the limitations of broad-based advice, recommends portfolios dominated by equities.

Self-understanding further contributes to investment success by helping investors avoid the all too human tendency to chase winners and to punish losers. So far, so good. Unfortunately, all good things, including year streaks, come to an end.

Fifteen fat years and three lean years produced an overall record of 8. Simple performance reports fail to capture the impact of these numbers on investor fortunes. 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.

On the way up, the fund management company and the press lionize 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. 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. My colleagues and I eagerly anticipated his contributions to our meetings.

We were never disappointed. Charley Ellis sets the standard. David F. Chances are also high that you are busy. And chances are high that you prefer candor and straight talk—particularly about money. Me too! Lucky me! Married to a wonderful and inspiring woman, I was born in the United States; privileged in education; blessed with parents, children, and grandchildren I like, admire, and enjoy; and also blessed with an unusually wide circle of friends.

With all these advantages comes a clear responsibility to serve others. Not so with k plans where individuals are on their own for their most important investment decisions and where they run the risk of outliving their money and suffering the dreadful risk of poverty in their old age.

The securities markets have changed massively, creating an overwhelming problem for individual investors. William S. He made it easier and better for every reader. How have the investment principles changed?

The core principles of successful investing never change—and never will. In fact, when short-term data appear to be most challenging to core principles is exactly when those principles are most important and most needed.

Sure the companies, markets, and economies come and go, but the core principles remain the same. Occasional periods of above-average results raise expectations that are soon dashed as false hopes.

Faced with information that contradicts what they believe, people tend to respond in one of two ways. Some ignore the new knowledge and hold to their former beliefs. Others accept the validity of the new information, factor it into their perception of reality, and put it to use. Most investment managers and most individual investors, being in a sustained state of denial, are holding onto a set of romantic beliefs developed in a long-gone era of different markets.

Investment management, as traditionally practiced, is based on a single basic belief: Investors can beat the market. Times have changed the markets, and that premise now appears to be false even for most professional investment managers.

See Figures 1. It gets worse during large periods of time, such as over a decade, where 68 percent of equity funds get beaten by the market. The manager could be different in stock selection, strategic emphasis on particular groups of stocks, market timing, or various combinations of these strategies.

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 big transactions, and so forth—85 percent of investment managers have and will continue over the long term to underperform the overall market.

Individual investors investing on their own do even worse— on average, much worse. Ramo observed that tennis is not one game but two: one played by professionals and a very few gifted amateurs, the other played by all the rest of us. Although players in both games use the same equipment, dress, rules, and scoring, and both conform to the same etiquette and customs, they play two very different games.

After extensive statistical analysis, Ramo summed it up this way: Professionals win points; amateurs lose points. 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. Brilliant shots, long and exciting rallies, and seemingly miraculous recoveries are few and far between. The ball is all 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 a scientist and statistician, Ramo gathered data to test his hypothesis in a clever way. He found that in expert tennis about 80 percent of the points are won, whereas in amateur tennis about 80 percent of the points are lost.

The two games are fundamental opposites. Amateur golf is another. No longer is the active investment manager competing with cautious custodians or amateurs who are out of touch with the market. Several thousand institutional investors—hedge funds, mutual funds, pension funds, and others—operate in the market all day, every day, in the most intensely competitive way.

The key question under the new rules of the game is this: How much better must the active mutual fund investment manager be to at least recover the costs of active management?

The answer is daunting. If we assume percent portfolio turnover implying that the fund manager holds a typical stock for 12 months, which is slightly longer than average for the mutual fund industry and we assume total trading costs commissions plus the impact of big trades on market prices of 1 percent to buy and 1 percent to sell again, average rates , plus 1.

Even the pros make macro-mistakes, particularly being fully invested together at market peaks, or choosing dot com stocks together. An active manager must overcome the drag of 3.

In other words, for you merely to do as well as the market, your fund manager must be able to outperform the market return by—nearly one-third— They have been losing. And for active individual investors, the record is even worse.

Indexing may not be fun or exciting, but it works. Investment counseling helps investors choose the right objectives. The competitive environment within which they work has changed dramatically in 50 years from quite favorable to very adverse—and it is getting worse and worse.

Trading investments among investors would by itself be a zero-sum game, except that costs such as commissions, expenses, and market impact must be deducted. These costs total in the hundreds of billions every year. Net result: Active investing is a seriously negative-sum game. To achieve better than average results through active management, you depend directly on exploiting the mistakes and blunders of others. Others must be acting as though they are willing to lose so that you can win after covering all your costs of operation.

Even in the s, when institutions did only 10 percent of the public trading and individual investors did 90 percent, large numbers of amateurs were realistically bound to lose to the professionals. We can understand why this was—and is—the reality of the situation by reviewing some of the characteristics of individual investors. Similarly, they sell stocks because a child is going off to college or they have decided to buy a home—almost always for reasons outside the stock market.

Candidly, when individuals act because of reasons they think are inside the market, they are usually making a mistake; they are either optimistic and late because the market has been rising or pessimistic and late during a falling market. In addition, compared to the full-time well-organized institutions, individual investors typically do not do extensive, rigorous comparison-shopping across the many alternatives within the stock market.

Most individual investors are not experts on even a few companies. Many rely for information from newspapers, cable television, the Internet, friends, or retail stockbrokers— many of whom are seldom experts. Individuals may think they know something important when they invest, but almost always what they think they know is either not true or not relevant or not important new information.

Anyone who feels offended by them is just being too sensitive. Back then, the professionals could and did outperform the amateurs. But that was half a century ago. The picture is profoundly different now.

In fact, 75 percent of all trading is done by the professionals at the largest and most active institutions, and fully half of all NYSE trading is done by the professionals at just the 50 largest and most active institutional investors.

Just how good and tough to beat are the hundred largest institutions? The institutions have Bloomberg and all the other sophisticated information services. Their professionals meet with corporate management frequently.

They all have teams of in-house analysts and senior portfolio managers with an average of 20 years of investing experience—all working their contacts and networks to get the best information all the time.

You get the picture: Compared to any individual investor, the institution has all the advantages. And what tough professionals they are!

Thus, as a group, professional investment managers are so good that they make it nearly impossible for any one professional to outperform the market they together now dominate. Even more discouraging to investors searching for superior managers is that those managers who have had superior results in the past are not likely to have superior results in the future.

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. More than brokerage commissions and dealer spreads are properly included in transaction costs.

This is a real liquidity trap. Think how differently people would behave on the highway or in the bedroom if they were sure they would be caught. All these costs are part of the total transactions costs. This makes the superior performance of Warren Buffett of Berkshire Hathaway and David Swensen of Yale all the more wonderful to behold.

It can be done, and it has been done by many investors some of the time. Making timely changes in portfolio structure or strategy. Developing and implementing a superior, long-term investment concept or philosophy. In short, why should it be all that hard to beat the market? Another form of timing would shift an equity portfolio out of stock groups that are expected to underperform the market and into groups expected to outperform.

But remember: Every time you decide to get out of the market or get in, the investors you buy from or sell to are professionals. The costs are real—and keep adding up. Yet it is at the crucial market bottom that a market timer is most likely to be out of the market—missing the very best part of the gains. In a bond portfolio, the market timer hopes to shift into long maturities before falling interest rates drive up long-bond prices and back into short maturities before rising interest rates drive down long-bond prices.

And the more often any are tried, the more certainly they fail to work. Market timing does not work because no manager is much more astute or insightful—on a repetitive basis—than his or her professional competitors. They may have been great before my time, but not one of them worked for me.

Not one! Decisions that are driven by greed or fear are usually wrong, usually late, and unlikely to be reversed correctly. The market does just as well, on average, when the investor is out of the market as it does when he or she is in it.

Therefore, the investor loses money relative to a simple buy-andhold strategy by being out of the market part of the time. One reason is particularly striking. Figure 2. Taking out the 10 best days—less than one-quarter of 1 percent of the long period examined— cuts the average rate of return by 17 percent from 18 percent to 15 percent.

Taking the 10 next best days away cuts returns B e at i n g t h e M a r k e t Removing a total of 30 days—just half of 1 percent of the total period—cuts returns almost by 40 percent, from 18 percent to 11 percent. Alas, we cannot and never will. They miss the surprisingly important best days.

Stock valuation dominates the research efforts of investing institutions and the research services of stockbrokers all over the world. The problem is that research is done very well by many. As a result, no single group of investors is likely to gain and sustain a repetitive useful advantage over all other investors on stock selection.

Because they are so large, so well-informed, and so active, institutional investors set the prices. Strategic decisions in both stock and bond portfolios involve major commitments that affect the overall structure of the portfolio. They are the third way to try to increase returns.

Each of these judgments involves what can best be described as market-segment risk. In theory, of course, this can be done, but will it be done?

Sure, it will be done occasionally, but by which managers? And for how long? The long-term record is not encouraging. And the record of individual investors identifying—in advance— which managers will succeed is downright discouraging.

The market giveth, and the market taketh away. Another possible way to increase returns is for an individual portfolio manager or an entire investment management organization to develop a profound and valid insight into the forces that will drive superior long-term investment results in B e at i n g t h e M a r k e t a particular sector of the market or a particular group of companies or industries and to systematically exploit that investment insight or concept through cycle after cycle in the stock market and in the business economy.

Other fund managers take the view that, among the many large corporations in mature and often cyclical industries, there are always some that have considerably greater investment value than most investors recognize. With astute research, these managers believe that they can isolate superior values and, by buying good value at depressed prices, achieve superior returns for their clients with relatively low risk.

Such organizations strive to develop expertise in separating the wheat from the chaff, avoiding the low-priced stocks that really ought to be low priced. Persistence can lead to distinctive competence in the particular kind of investing in which a manager specializes. The great disadvantage is that if the chosen kind of investing becomes obsolete, overpriced, or out of touch with the changing market, a focused, specialist organization is unlikely to detect the need for change until it becomes too late—for its clients and for itself.

What is remarkable about profound investment concepts is how few have been discovered that have lasted for long—most likely because the hallmark of a free capital market is that few if any opportunities to establish a proprietary long-term competitive conceptual advantage can be found and maintained for a long time.

The markets for good ideas are among the best in the world: Word gets around very quickly. All of these basic forms of active investing have one fundamental characteristic in common: They depend on the errors of others. While this sort of collective error does occur, we must ask how often these errors are made and how often any particular manager will avoid making the same errors and instead have the wisdom, skill, and courage to take action opposed to the consensus.

However, there are other kinds of opportunities for achieving more success as a long-term investor. One way to increase success in lifelong investing is to reduce mistakes and errors. Trying too hard—and thus courting disappointment—is all too often eventually expensive because taking too much risk is too much risk.

Being too defensive—letting short-term anxieties dominate long-term thinking and acting—can be expensive. All the way! About 10 percent of those boys are honest to God soldiers! Take a bow—but watch out! Even if you are a far above-average investor, you are almost certain to be making below-average trades or investment decisions. Even if you were among the very best amateurs, that would make your transactions below average.

And if 90 percent of the pros trade with more skill than you have—which is, alas, almost certain—your transactions will, on average, be deep in the bottom quartile.

He found that on average the stocks these investors bought underperformed the market by 2. Similarly, a paper published by Brookings Institution economists Josef Lakonishok, Andrei Shleifer, and Robert Vishny showed that the stock trades made by professional fund managers subtracted 0.

Experienced investors all understand four wonderfully powerful truths about investing, and wise investors govern their investing by adhering to these four great truths: 1.

The dominating reality is that the most important investment decision is your long-term mix of assets: how much in stocks, real estate, bonds, or cash. That mix should be determined partly by the real purpose—growth, income, safety, and so on——and mostly according to when the money will be used.

Diversify within each asset class and between asset classes. Bad things do happen—usually as surprises. Be patient and persistent. So is setting the right course—which takes you back to 1. They pay higher fees, incur great costs of change, and pay more taxes. The importance of being realistic about investing continues to increase because the markets are increasingly dominated by large, fast-acting, well-informed professionals armed with major advantages.

For individuals, the grim reality is far worse. End Notes 1. This is one of the peculiarly dangerous months to speculate in stocks. Zweig was reporting on research by Javier Estrada.

Over the very long run the market can be almost boringly reliable and predictable. Understanding the personalities of two very different characters is vital to a realistic understanding of the stock market and of yourself as an investor. Value goes about his important work almost totally ignored by investors. Value does all the work while Mr. Market has all the fun and causes all the trouble. Introduced in the classic book The Intelligent Investor1 by Benjamin Graham, who also introduced professionalism to investing, Mr.

Market occasionally lets his enthusiasms or his fears run wild. Emotionally unstable, Mr. Market sometimes feels euphoric and sees only the favorable factors affecting a business; at other times he feels so depressed that he can see nothing but trouble ahead. To provoke us to action, he keeps changing his prices—sometimes quite rapidly.

Totally unreliable and quite unpredictable, Mr. Market tries again and again to get us to do something—anything, but at least something. For him, the more activity, the better. These events come from his big bag of tricks when they are least expected. Just as magicians use clever deceptions to divert our attention, Mr.

Market dances before us without a care in the world. And why not? He has no responsibilities at all. Value, a remarkably stolid and consistent fellow, never shows—and seldom stimulates—any emotion. He lives in the cold, hard, real world where there is nary a thought about perceptions or feelings. He works all day and all night inventing, making, and distributing goods and services. His role may not be emotionally exciting, but it sure is important. Value always prevails in the long run. Eventually, Mr.

In the real world of business, goods and services are produced and distributed in much the same way and in much the same volume when Mr.

Market from their sound long-term policies for achieving favorable long-term results. Similarly, wise parents of teenagers avoid M r. Va l u e hearing—or, worse, remembering—too much of what their teenagers say in moments of stress. The daily weather is comparably different from the climate. Weather is about the short run; climate is about the long run— and that makes all the difference.

Investors should ignore that rascal Mr. Market and his constant jumping around. The daily changes in the market are no more important to a long-term investor than the daily weather is to a climatologist or to a family deciding where to make their permanent home. Investors who wisely ignore the deceptive tricks of Mr. Market and pay little or no attention to current price changes will look instead at their real investments in real companies—and to their growing earnings and dividends—and will concentrate on real results over the long term.

Such an understanding enables us to live rationally with markets that would otherwise seem wholly irrational. At least we would not so often get shaken loose from our longterm strategy by the short-term tricks and deceptions of Mr. For the serious student of markets, they are not truly surprises: Most are really almost actuarial expectations, and long-term investors should not overreact.

The same goes for pilots. The young pilots never catch on that these very unusual events are, sadly, an integral part of the dangers inherent in their striving to achieve superior performance.

In investing, these anomalous events occur when an unusual or unanticipated event—ones that the manager understandably sees as quite unexpected and almost certain never to recur in exactly the same way again—suddenly wipes out what otherwise would have been superior investment performance.

The long term is inevitable. It is regression to the mean all over again. The biggest challenge in the stock market is not Mr. Market or Mr. The biggest challenge is neither visible nor measurable; it is hidden in the emotional incapacities of each of us as investors. Being rational in an emotional environment is not easy, particularly with Mr. Market always trying to trick you into making changes. End Note 1. I want to beat the market! Warren Buffett? Done deal. He and his partner Charlie Munger are on your team.

Peter Lynch? George Soros? In fact, you can have all the best portfolio managers in the country and all the analysts who work for them on your dream team.

In fact, you can have all the best professionals working for you all the time. All you have to do is agree to accept all their best thinking without asking questions. And as they learn more, they will quickly update their judgments, which means that you will always have the most up-to-date consensus when you index. Peace of mind is one.

Most individual investors have to endure regret about their mistakes—and anxiety about potential future regret. Both are unnecessary. These persistent costs mount up unrelentingly and do as much harm to investment portfolios as termites do to homes. Avoiding them—by investing in index funds—will make you a winner. Still, accepting the consensus of the experts is not always popular. But it will, over time, achieve better results than most mutual funds—and far better results than most individual investors achieve.

Considering all the time, cost, and effort devoted to achieving better-than-market results, the index fund certainly produces a lot for very little. The securities market is an open, free, and competitive market in which large numbers of well-informed and price-sensitive professional investors compete skillfully, vigorously, and continuously as both buyers and sellers.

Nonexperts can easily retain the services of experts. Prices are quoted widely and promptly. Effective prohibitions against market manipulations are established. An index fund provides investment managers and their clients with an easy alternative. They do not have to play the more complex games of equity investing unless they want to. Given the intensity and skill of the competition, superior knowledge is rare.

The option to use an index fund enables any investor to keep pace with the market virtually without effort. It allows you to play only when and where and only for so long as you really want to— and to select any part of the wide investment spectrum for deliberate action at any time for as long or as brief a period as you wish. Those following this path are sure to beat the net results after fees and expenses delivered by the great majority of investment professionals.

Winning the Loser's Game reveals everything you need to know to reduce costs, fees, and taxes, and focus on long-term policies that are right for you. Candid, short, and super easy to read, Winning the Loser's Game walks you through the process of developing and implementing a powerful investing strategy that generates solid profits year after year.

In this eagerly awaited new edition, Charles D. Ellis applies the expertise developed over his long, illustrious career. Download Discrimination and Disparities - Thomas Sowell. Download Flash Boys - Michael Lewis. Download Liminal Thinking - Dave Gray. Download Principles of Microeconomics - N. Download Psicolog? Download Versace - Stefano Tonchi. Van Note. PDF El arte de cerrar la venta: La clave para hacer m? Robert Jacobs. Benton Jr.

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