About the coronavirus crisis: “We’ll come out of this darkness in a very powerful way,” Charles “Charley” Ellis, renowned investment strategy consultant to large institutions and author of the classic bestseller “Winning the Loser’s Game,” tells ThinkAdvisor in an interview.
The “loser’s game,” by the way, is active investing, according to Ellis, who has been a staunch index fund advocate for more than half a century.
Founder of research-based consultancy Greenwich Associates, which he led for three decades, and chair of the Whitehead Institute for Biomedical Research, Ellis, 82, points to a high level of U.S. pent-up demand for goods and services, and argues that a safe, effective coronavirus vaccine will be produced in a year’s time.
In the interview, he also forecasts that the recovery will be “relatively rapid,” estimating that most of the “rebuilding” should be achieved in a year.
Ellis has championed index fund investing all the way back to his doctoral dissertation, written while attending New York University. His most recent book is “The Index Revolution: Why Investors Should Join It Now” (2016).
Especially in today’s chaotic market, better to index than use the active investing approach because index funds don’t “let us get fooled by Mr. Market,” he says. Day traders “will get clobbered.”
Indexing is “boring” — and that’s a good thing, he argues strenuously.
Ellis, who is on Wealthfront’s advisory board and Rebalance’s investment committee, was a successor trustee of Yale, where, with David Swensen, he chaired the university’s investment committee.
Amid his personal portfolio of index funds is an individual equity he’s been investing in for some 50 years. He discusses that stock, which he frames as similar to “a well-managed index fund” with extras.
He is a recipient of the Graham and Dodd Award of Excellence from the Financial Analysts Journal and has served on the governing boards of Harvard, Yale and NYU’s business schools.
ThinkAdvisor interviewed Ellis on June 22. He was speaking by phone from his home in Connecticut. His overall advice about investing in ETFs: “Anything you can do to make the decision less specific and less interesting probably works to your advantage,” he says.
Here are highlights of our conversation:
THINKADVISOR: Is your mindset that the coronavirus isn’t going away anytime soon; therefore, we’ll just have to live with it? If so, how will that affect the economy and markets?
CHARLEY ELLIS: For many years I’ve chaired the Whitehead Institute for Biomedical Research, and I’ve learned a lot. I’m very comfortable believing that it will take as long as a year from now for us to have prevention and that we’ll come out of this darkness in a very powerful way.
How long will the recovery take, do you think?
If I’m right, it’s a relatively rapid recovery process. We’ve never had so many people working collegially and sharing information as now. The biggest problem will be once we have a workable product, how to make enough to meet the needs of society — and who goes first. It will be a marvelous challenge to ethics and fair play.
Please elaborate on “We’ll come out of this darkness in a very powerful way.”
We’ve got a lot of things to catch up on. I don’t know anybody who feels that being incarcerated in their own home is a deeply fulfilling experience. People are making notes of things they really want to do or buy — there’s quite a lot of pent-up demand. My bet is that there will be a lot of catching up on business and a lot of desire to catch up on recreation and travel once [those pursuits] are assured to be safe.
Will everything be as rosy as that?
We’ll have some permanent loss and changed habits; for example, we’ll lose restaurants that are barely making it, and some airlines and hotels.
Do you see the recovery taking shape in any particular configuration, such as a “W” or “U”?
No, because we see those shapes looking back after the fact, rather than knowing what the characteristics are that will cause the progression to look like them. I don’t see the recovery as a sharp response because there’s a lot of rebuilding, reorganizing, rehiring and retraining needed; and that will take some time. But I think 80% or 90% of it would be accomplished in a year.
To what extent should the Federal Reserve further support the economy with stimulus?
We’re down to the last few bullets in terms of the Fed being able to do what it’s so skilled at doing. The problem is they’ve done virtually everything they could do. They’ve made their [moves]; and if something comes along that creates another major difficulty, they don’t have reserve funds to put in play.
But they give the impression that they have those.
They do in the sense that they can print money and then put it to work. But the Fed knows that they have to find a way out of the dilemma before other people — other nations’ reserve systems — say, “We’re not going to let you do that anymore.”
What responsibility does business have to balance the two huge goals of reopening the economy so that money can be made and keeping people safe at the same time?
When it’s something as consequential as the whole population needing leadership, you go to the state or federal government. But the responsibilities of business are really just an easy checklist: Be sure everybody knows what the realities are, that we all wear masks, that people are well informed and that the senior [management] in the organization model the model.
Regarding leadership, often the federal government presents a distorted reality. Your thoughts?
Yes, today that’s the terrible reality. The absence of leadership is bad enough. Thank goodness for Dr. [Anthony] Fauci. We need him to speak out.
“Mr. Market is a gyrating gigolo who represents the temptations of market trading … He is a clever deceiver,” you write in “The Index Revolution.” Are we seeing an exaggerated version of that right now?
Probably, because people have more time on their hands. Mr. Market is the recipient of our emotional characteristics. There’s a fair share of people complaining about the pandemic because they’re gaining weight or drinking more — maybe the same group. Once you change behavioral characteristics, you can get consequences.
When we let our emotions get going, especially if we have enough time, we can talk ourselves into all kinds of unfortunate mistakes that can turn out to be pretty expensive.
Do you have any idea what the next phase of the market might be? It’s highly volatile now.
It’s easy to imagine the market going up and down quite a lot because you’ve got a very sophisticated professional group who’s dominant most of the time. Probably a modest fraction of the volume on top of that is amateurs saying, “Hey, this is kind of fun! I’m sitting around the house — so why don’t I do this [trading] for an hour or two every day.” We’ve had day-traders before, and [like those, the current ones] will get clobbered over time because they just won’t know enough.
Is indexing helpful to investors under the present circumstances?
It sure is. It’s the best possible thing. First, it has much lower cost. Second, there’s much lower turnover and therefore fewer taxes; third, operating costs are sometimes as low as zero. But the wonderful advantage about indexing is that you don’t get all excited about it. That’s so different from “My favorite stock was up yesterday!”
Why is it a great advantage not to get excited about an investment?
[In general] we get emotionally attached to very specific things and don’t get attached to aggregates. All the things that Mr. Market does to get us fooled are put off to the side when you’re indexing because indexing is boring — thank goodness! There’s something to be said for its not being all that interesting.
What do you think Benjamin Graham [“Father of Value Investing” who wrote “The Intelligent Investor”] or Jack Bogle [created first index fund and founded Vanguard] would say about what’s going on in the market now?
Both would be uncomfortable. Ben and I participated in a seminar series I used to do for Donaldson Lufkin and Jenrette in the old days. He was very sure that most of the investment managers sitting around the table — the best in the country — would underperform an index fund. And of course Jack Bogle [felt] very much the same way.
What’s your thinking about ETFs right now?
I’m dead set against ETFs on narrow segments of the market, such as a gold ETF. Anything that you can do to diversify widely is a big advantage. For instance, diversifying by time or buying internationally. Anything you can do to make the decision less specific and less interesting probably works to your advantage.
Should financial advisors start liking index funds more?
They do. Indexing has been a very important part of the RIA business because investment advisors, who charge a fee, love to be able to get a lot of assets at very low cost into portfolios so that their fees fit right in. RIAs have been a very important part of the flow toward ETFs and index funds.
What statistics compare active managers’ performance to that of index funds?
SPIVA [S&P’s Indices Versus Active funds scorecard] now has 15 years of data showing that 89% of actively managed funds underperformed by a great deal more [compared to the increase] when they outperform.
Robo-advisors obviously make it easy to day-trade. Is that a positive?
They make it very easy for people to get low-cost portfolio services. Brokerages that allow electronic commission-free trades — “Come have a good time!” — is something that will be disastrous for individuals. In most cases, they won’t lose more than they can afford to — but they’ll wish they hadn’t done [that level of trading].
Are you still invested almost entirely in index funds?
I’ve got an old and very happy investment in Berkshire Hathaway, which, in many ways is like a well-managed index fund with a little bit of extra coming [by way of] Warren Buffett and how smart he’s been and a little extra because of his ability to use [insurance] float and a little extra because of his reputation and the organization.
In a nutshell, what’s one of the biggest reasons for your holding onto that stock?
Berkshire is certainly broadly diversified and certainly not very interesting day to day. It’s got all the benefits I’m looking for!
Any other reason for sticking with it?
I know Warren Buffett a little bit; so I don’t want to bump into him some day and hear him say, “Well you sold out of our company!” I’ve been invested in Berkshire about 50 years. When I was teaching business ethics at Yale, I asked Warren if he’d come to [New Haven] and join a class. He said, “Nice idea; but I just don’t have the time. However, if you’ll bring your students to Omaha, I’ll spend a couple of hours with them.”
What an opportunity!
So I brought the class of 26 students to Omaha, and we had two hours with him. We were loaded for bear with about two dozen questions. But we only got to ask three because Warren gave such complete, rigorous and thoughtful answers that the class was over by the time we got that far.
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