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Winning The Loser's Game [Secure eReader]
eBook by Charles D. Ellis

eBook Category: Personal Finance
eBook Description: This indispensable investment guide asks the question: How can an individual invest successfully when the majority always fails? Charles Ellis, one of today's most brilliant investment writers, has updated his influential book to include: Ways to escape the ravages of taxes and inflation; How to successfully pass your estate to your heirs (not the taxman!); Common investing mistakes and painless strategies to avoid them.

eBook Publisher: McGraw-Hill Companies, Published: 2002
Fictionwise Release Date: May 2002




Preface

You are holding the third edition of this book, which is embarking on its second life. The first two editions, which appeared in 1985 and 1993, were written for an audience of professional investment managers and their large clients, such as pension funds and endowments. But this edition is written for a second, entirely new audience: individual investors.

The generous reception given to the previous editions -- not just among directors of large corporations and trustees of prestigious endowment funds, but also among individual investors -- has encouraged two decisions. One is to update the data and the dates, and the other is to address directly the quite important ways in which individual investors should think through the vital issues affecting their private investment policies, particularly those two grim factors, mortality and inflation. The focus on the needs of individual investors has been and will continue to be increasingly important as more and more people become dependent on self-directed 401(k) plans for financial security during retirement -- plans that the individual participant self-directs. Freedom, particularly financial freedom, can be a two-edged sword.

This book has a long history. Increasingly aware of the great difficulty my intelligent, conscientious, and very hardworking friends were having in their quest to beat the market, in 1975 I organized my thoughts on their problem into an article entitled "The Loser's Game," which was well received within the investment profession -- which is so remarkably open to ideas, particularly ideas that challenge. (It won the profession's highest award.)

While many found that provocative article a challenge to our profession, I felt challenged in a very different way. Raised in the tradition that says "If you find a problem, find a solution," I felt intrigued by the task of finding a solution to the problem identified in "The Loser's Game." As is so often true, the solution was to "think outside the box" and to redefine the problem. So my focus shifted from the "loser's game" (working ever harder in a futile effort to beat the market) to a "winner's game" of concentrating on the big picture of longer-term asset mix and investment policy. And so this book took shape as Investment Policy, a text for clients of institutional investment managers, particularly trustees of pension funds and endowments, that first appeared in 1985 and was revised and updated in 1993.

The boom in investing by individuals -- particularly those who have entrusted their retirement assets to 401(k) plans and so must establish their own asset mix or investment policy -- has given this book a crucial new audience: the millions of individual investors who need to know how to make their money grow successfully over the long run.

Individual investors are important to me for three major reasons: First, there are so very many of them, nearly 50 million in America and almost as many in other nations; second, almost all individual investors are truly "on their own" in designing long-term investment policies and strategies because there are few investment managers who can afford to provide the counseling individuals need at a reasonable fee; and third, virtually all "how-to" books on investing are sold on the false promise that the typical individual can beat the professional investors. They can't and they won't.

And they don't have to. As the reader will soon see, successful investing does not depend on beating the market. Attempting to beat the market -- to do better than other investors -- will distract you from the fairly simple but quite interesting and productive task of designing a long-term program of investing that will succeed at providing the best feasible results for you in the long run.

If you feel -- as I do -- that some of the advice in this book is pretty simple, please keep in mind the observation of two of my best friends, who are at the peak of their distinguished careers in medicine and medical research. They agree that the two most important discoveries in medical history are penicillin and washing hands (which stopped the spreading of infection from one mother to another by the midwives who delivered most babies before 1900). What's more, my friends counsel, there's no better advice on how to live longer than to quit smoking and buckle up when driving. The lesson: advice doesn't have to be complicated to be good.

Times change, and a note of current caution may be appropriate. When this book was first written 15 years ago, the equity market appeared significantly underpriced. Since then, America has enjoyed a remarkable bull market -- one we will not see repeated from present price levels. The basic concepts and policies still hold, but their execution is no longer a "six-inch putt." Investors should be cautious at current market prices.

A large English oak table dominating the inside left corner of the Morning Room on the ground floor of Boodles, the oldest of the social clubs established more than a century ago in or near St. James's in London, is one of the places where parts of this book were written. Other locations include hotel rooms in -- and airplanes flying between -- Johannesburg, San Francisco, Chicago, Nairobi, Princeton, Maine, Bermuda, Vail, Boston, New York City, and Atlanta; and of course, at home in Greenwich.

Because my priorities have been my commitments to my family and to the clients of Greenwich Associates, completing this small book has taken a very long time. This long period of gestation has been advantageous to the final result because it has given me the time and opportunity to obtain and incorporate some of the wisdom and knowledge of thoughtful others.

Several friends have given generously of their time and experience in reading and criticizing the various stages of development through which this book has passed on its way to its present form.

Claude N. Rosenberg, Jr., saved it from the oblivion to which it might have been consigned by insisting on a client focus and joshing me out of an inclination toward the stiffness of "academic" writing. Credit for readability belongs to Claude.

Dean LeBaron encouraged me with a delightful mixture of friendly admonition and cheerful "pourquoi non?" that must have masked some genuine doubts.

Rosalind C. Whitehead applied her brilliant talents as a writer and as an advocate for those in need as she took up the daunting task of bringing clarity to areas of uncertain explanation and took encouraging delight in the clarification.

William G. Burns, Karl Van Horn, and Chris Argyris all gave me particularly useful comments and raised questions that led to additions in several key sections that I will always want to claim.

Robert H. Jeffrey gave the kindest compliment by reading each section with the rigor of a Jesuit instructor and offered extensive suggestions on the main theory and on the structure of the argument -- and even on choice of words. Tad chastised me a dozen years later -- fortunately in time to influence this new edition -- for giving too little attention to managing the expense of taxes. Any writer would be grateful for the chance to experience such insistent and gracious thinking and editing.

Dero Saunders applied his considerable talents as an editor and instructor in two complete rewritings. I now know why he expects to be remembered as the editor who could remove four lines from the Lord's Prayer without anyone noticing.

Paul Bourdeau of Cummings & Lockwood contributed skillfully to the concepts of estate planning.

Jason Zweig, Money's wonderfully astute and insightful tribune for individual investors, gave generously of his expertise as an observer and skills as a writer and his care in improving the clarity and usefulness of every chapter. All of us are fortunate he is among us.

Howard P. (Pete) Calhoun, in a decisive act of friendship, identified an error in the arcane world of taxation that allowed me to make an appropriate timely correction.

Kimberly Breed, Lucy Carino, Ann Del Grande, Jeanne Gans, Sandy Jones, and Debra Jo Pennell, all members of Greenwich Associates, typed and retyped the all too numerous drafts through which the final text evolved.

Masanori Owa of Japan's Long-Term Credit Bank gave the sincerest and most moving compliment when he not only translated the words of this book into the Japanese language, but also translated the concepts from my culture to his -- and began what has become, through a series of meetings over the years, a most happy friendship.

Special thanks are due to dozens of senior investment professionals who have participated in a series of three-day seminars on investment policy and practice -- sponsored by my friends and former partners at Donaldson, Lufkin, and Jenrette -- which it has been my great privilege to lead for nearly 30 years. Many of the ideas in the book have been developed at these seminars. Others were developed with and for the graduate students I so enjoyed teaching at Harvard Business School and the Yale School of Management and the participants at AIMR's in-service course for senior professionals given each summer at Princeton.

Finally, I wish to recognize explicitly my admiration and respect for the large number of extraordinarily talented, resourceful, and hardworking men and women who compete for success at our nation's investing institutions and securities firms. It is a profound but ironic compliment that their skillful striving is what has made it possible to propose the approach to investment policy advocated in this book.

Copyright © 1998 by Charles D. Ellis


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