Investment Lessons from Wall Street’s Wisest Man

Boring is better.

This cheeky headline appeared on an advertisement we ran a couple years ago in the Portland Business Journal.

Inspired by renowned investment consultant Charles “Charley” Ellis, the headline captures the essence of sensible investing—a topic about which Ellis knows a lot.

Ellis’ books are required reading for new employees at Vista, and a few years ago we renamed a conference room after him.

In honor of his 82nd birthday this month, I’d like to share more of Charley’s advice.

Don’t Play the Loser’s Game

In his seminal work, “The Loser’s Game” (1975), Ellis boldly challenged a decades-old investment belief.

“Most institutional investment managers,” he wrote, “continue to believe, or at least say they believe, that they can and soon will again ‘outperform the market.’ They can’t and they won’t.”

Ellis had done his homework.

In the early 70s, Ellis found that, as a group, professional portfolio managers not only underperformed the market, but their results appeared to be getting worse over time.

Little appears to have changed since.

For the 15 years ending December 2018, Standard & Poor’s reported between 79% and 98% of actively managed stock mutual funds underperformed their benchmarks. Results were similar among active bond managers.

Undeterred by the evidence, Wall Street managers continue to promote last year’s “winning” fund and claim this year will be better. Believing them, concludes Ellis, “is a loser’s game. And only a sucker backs a ‘winner’ in a loser’s game.”

Use Low-Cost Index Funds

If the market routinely beats even experienced investment advisors, why do we persist in trying to win at a loser’s game?

Because we’re human. “Although everybody knows that patrons of gambling casinos are, as a group, significant losers,” explains Ellis, “the tables and slots stay busy.”1

So what’s the best way to avoid the loser’s game in investing?

Stop trying to beat the market, says Ellis. Instead, concentrate on building a long-term investment portfolio to achieve key objectives and use low-cost index funds.2

Like Ellis, we are index fund enthusiasts. Low-cost index funds have been—and will continue to be—the foundation of Vista client portfolios.

Protect Your Portfolio from Yourself

In “Winning the Loser’s Game” (1998), Ellis asserts that the toughest part of investing is not intellectual, but emotional.

“The principal reason we should all articulate our long-term investment policies explicitly and in writing,” he shares, “is to protect our portfolios from ourselves.”

Indeed, most investors—whether fueled by the media, their own emotions, or intuition—doom themselves to failure.

When I began my investment career in 2001, U.S. stocks had for years provided eye-popping annual returns of 30%. Investors responded by pouring even more money into the technology-fueled boom, just as the market peaked.

It wasn’t until after the damage was done—the S&P 500 subsequently fell nearly 50%—that investors withdrew record amounts from stock funds. Just months later, markets rebounded and finished 2003 up 32%. But by selling out at the bottom, investors locked in their losses and missed out on the best returns.

Sadly, investors behaved similarly during the financial crisis of 2007 to 2009. While all too common, a “buy high, sell low” strategy is nothing but a recipe for the poorhouse.

To negate the tendency to misbehave, investors should adopt a written policy which incorporates a disciplined rebalancing strategy. It’s simple, but not easy.

Ellis agrees. “Holding onto a sound policy through thick and thin is both extraordinarily difficult and extraordinarily important.”

Be a Prudent Investor

Year after year, research proves that turning away from the “excitement” of stock picking and market timing in favor of “boring” low-cost index funds is the most prudent way to achieve a successful investment experience.

“What really matters most,” concludes Ellis, “is figuring out—often best done with a professional investment adviser—the long-term investment program that is best suited to you: your financial resources, your spending objectives, your time horizon and your ability to stay the course.”3

We’re here to help. Happy Birthday, Charley!

 

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1 “Murder on the Orient Express: The Mystery of Underperformance.” Charles D. Ellis, CFA. Financial Analysts Journal, Volume 68, Number 4. 2012.

2 The Elements of Investing: Easy Lessons for Every Investor. Burton G. Malkiel and Charles D. Ellis. New Jersey: John Wiley & Sons Inc. 2010.

3 “My Investment Letter: Words of Advice for My Grandchildren.” Charles D. Ellis. AAII Journal. October 2013.

 

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