Winning the Loser’s Game – Book Review

by Mike Holman

Winning the Loser’s Game is written by Charles D. Ellis and is based on a ground breaking 1975 article he wrote for the Financial Analyst’s Journal on passive investing.

This book is similar to Bernstein’s Four Pillars of Investing and Malkiel’s Random Walk Down Wall Street in that the main theme is active investing can’t beat the market so investors are better off using low cost index funds. Ellis doesn’t go into the detail that Bernstein and Malkiel do and he also tends to stick to his main message and doesn’t get into portfolio advice such as asset allocation. I found the book well written and quite entertaining. Although the indexing message has been written about in many other books, he finds interesting ways to explain why indexing is the best investment method.

The title of the book comes from his explanation of how amateur tennis is an analogy for the investment game. According to Ellis, professional tennis is a winner’s game because the ultimate outcome is determined by the action of the winner. Amateur tennis is very different because the outcome if determined by the loser. In amateur tennis, the skill levels are so low that neither player is capable of a “winning” play very often. In fact the the winner of this game gets a higher score because his opponent is losing even more points.

Ellis says that the investment field used to be a winner’s game because prior to the 1970’s, 90% of the trades on the NYSE were by individual investors so the professionals could realistically beat the “amateurs” if they were good enough. By the 1970’s however most of the trades on the NYSE were by institutions so investment professionals were now competing against themselves (other professionals). They couldn’t beat the market anymore because they were the market.

Part of the book is about investment policy which I found quite interesting. Ellis suggests that investors should write down their investment policy and by referring to it periodically it will help determine if the policy is being followed. For example if you want a conservative portfolio and it goes up 30% in one year then your portfolio doesn’t match your policy.

I did get a laugh at his comment on leveraged investing since I just started doing some leveraging myself.

“The saddest chapters in the long history of investing are tales about investors who suffered serious losses they brought on themselves by trying too hard or by succumbing to greed. Leverage is all too often the instrument of self-destruction.”

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