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April 14, 2021 at 02:44 PM
A big secret to success in the stock market? “Ignore the beat-the-market hype of brokerage firms, actively managed mutual funds and investment letters from stock market gurus working in cahoots with Mr. Market. If you’re a serious-minded long-term investor, what Mr. Market does isn’t good for you.”
So argues Charles “Charley” Ellis, famed investment strategy consultant, in an interview with ThinkAdvisor.
He will release the eighth edition of his classic bestseller, “Winning the Loser’s Game: Timeless Strategies for Successful Investing,” (McGraw-Hill Education) on May 18.
Instead of active investing, the legendary consultant to big institutions and founder of Greenwich Associates, which he led for 30 years, strongly favors indexing and has done so ever since he wrote his doctoral dissertation at New York University.
In the interview, Ellis, 83, reveals the three major ways active managers lose: wrong asset mix, wrong stocks, wrong timing.
He maintains that compared to active management, for long-term investing index funds “guarantee” better returns, lower costs, lower fees and lower taxes. Those attributes are responsible for the striking increase in indexing’s popularity over the last several years, stresses Ellis, who earned his MBA at Harvard Business School and has been honored by the CFA Institute for lifetime contributions to the investment profession.
In our conversation, he opines on the bond market, ETFs and non-fungible tokens, or NFTs, the excitement over which reminds him of a certain infamous investing mania of 17th-century Holland.
His outlook for the U.S. economy remains bullish, unchanged from his forecast in an interview with this reporter last June. For one, he has expectations for resumption of strong consumer spending as soon as “the plague will be over.”
Ellis, who in 2016 published “The Index Revolution: Why Investors Should Join It Now,” is on Wealthfront’s advisor board and the investment committee of Rebalance. He was a successor trustee at Yale, where, with David Swensen, he chaired the university’s investment committee.
ThinkAdvisor recently interviewed Ellis, who was speaking from his Connecticut base. Remarking on how investors can be fooled, he stressed that manipulating emotions is Mr. Market’s M.O.
Here are excerpts from our conversation:
THINKADVISOR: What’s your view of NFTs — non-fungible tokens?
CHARLEY ELLIS: Some people made money in tulips in Holland too, you know.
What’s your thinking about exchange-traded funds?
I wouldn’t do an exotic ETF under any circumstance — taking a narrow focus and especially if you put unfortunate things, like leverage, on it. For instance, a gold ETF or a medical instruments ETF doesn’t make any sense to me.
Do you still refrain from investing in bonds?
Certainly. If you buy a bond today, you get a little less than 2% as cash income, and the Fed wants to have 2% inflation as a norm. If inflation goes up to 3%, bond prices come down. So you lose money on the capital side, and you break even with inflation on the income side. I don’t think of that as a very exciting, positive investment.
You’ve argued for decades that investment management is “a loser’s game.” How so?
Because when you’re competing to outperform, the dominant controlling variable will be the behavior of the loser. There are three ways of losing: having the wrong asset mix, picking the wrong stocks or bonds, and having the wrong timing.
So how have active managers performed over the last several years?
According to SPIVA [S&P’s Indices Versus Active Funds Scorecard], they’ve become gradually worse and worse over time. That’s because there are so many different forces that are making markets quote-unquote efficient — more accurately priced — or harder and harder to beat.
