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Charley Ellis

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Stock Buyback Tax Is a 'Silly Mistake': Charles Ellis

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“You hit the hot button!” exclaims legendary investment strategist and consultant Charles “Charley” Ellis, author of the classic bestseller “Winning the Loser’s Game,” in an interview with ThinkAdvisor.

The former CFA Institute chair is referring to the new 1% excise tax on stock buybacks for companies, which is part of the Inflation Reduction Act signed into law Tuesday. “This is Congress making a silly mistake. It looks like someone decided almost for spite to put a 1% tax on [buybacks],” he says. 

The tax’s impact? It will, on a small scale, “reduce the rate of growth of our economy and distort the decisions made by corporations,” he forecasts.

Ellis, 84, who founded Greenwich Associates, the famed research and consulting firm to large global institutions and which he led for 30 years, has just published his 19th book.

“Figuring It Out: Sixty Years of Answering Investors’ Most Important Questions” (Wiley, Aug. 9) covers a wide range of issues about which Ellis has provided his expert insight over the past six decades. (It includes a 20-page chapter on stock buybacks.)

A leading proponent of indexing, he is baffled, if not confounded, that so many investors “honestly believe that what they should be doing is beating the market,” he says.

Instead, “if you’d like to be in the top 25% over a 10-, 15-, 20-year period, the answer is indexing,” according to Ellis.

Amid market volatility, a widely anticipated recession and chaotic world events, Ellis recommends studying economic and market history to avoid being rattled by recent news and information.

“We ought to be more coldblooded, independent-minded, rigorous in our thinking,” he argues.

Ellis was a successor trustee at Yale, where, with David Swensen, he chaired the investment committee. Today, he is on the investment committee of the wealth management firm Rebalance.

In the interview, he highlights the value of financial advisors in developing customized financial plans for clients and reminding them: “Be steady on your plan. Don’t get shaken loose.”

ThinkAdvisor recently interviewed Ellis, who was speaking by phone from his Connecticut office. 

He gave a micro-preview of his next book, “Inside Vanguard,” to be published in October:

“Most people think of [Vanguard] only as a low-cost mutual fund organization. That’s part of it. But it’s not anywhere near the whole truth,” he says.

Here are excerpts from our interview:

THINKADVISOR: What are your thoughts about the new 1% stock buyback tax for companies that’s part of the Inflation Reduction Act?

CHARLEY ELLIS: You hit the hot button! This is Congress making a silly mistake. It looks like someone decided almost for spite to put a 1% tax on [buybacks].

Why do you say that?

It doesn’t have any long-term purpose, and it’s going to get in the way of efficient use of capital. And in a tiny, tiny way, it’s going to reduce the rate of growth of our economy. And it will distort the decisions made by corporations by a little bit.

You wrote an article for the Harvard Business Review in 1965 about “share repurchasing,” or buybacks. The idea was to repurchase stock to revitalize equity. 

Most companies had “never considered” this, you said. Please elaborate on what you think of buybacks today.

[They’ve] now become a very nice tool for managing the balance sheet of a major corporation.

Why in the world would anybody complain, if you’ve got more equity capital than you ought to use, to return it to shareholders through share repurchase and dividends?

It’s freedom to have a disciplined approach to your capital spending.

You frequently ask people, “What’s the most interesting thing that you know?” So what’s the most interesting thing that you know?

It’s that it’s still possible to find large numbers of people who honestly believe that what they should be doing is beating the market.

Everybody’s trying to get top-quintile investment results, and almost nobody gets them and keeps them.

If you’d like to be in the top 25% over a 10-, 15-, 20-year period, the answer is indexing.

In your 1975 paper “The Loser’s Game,” which preceded your book “Winning the Loser’s Game,” you write: “Most money managers have been losing the Money Game. … The burden of proof is on the person who says, ‘I am a winner. I can win the Money Game. 

“[And] because only a sucker backs a ‘winner’ in a Loser’s Game, we have a right to expect him to explain exactly what he’s going to do and why it’s going to work so very well. 

“This is not very often done in the investment management business,” you note.

Please explain.

We could do a lot better than we do if we weren’t so focused on making more money and if we were able to think in terms of longer-term investment results rather than how the portfolio is doing week to week, month to month.

Your new book, “Figuring It Out,” is about answering investors’ most important questions over the past 60 years. What’s the most important question you’ve been asked?

One of them is: Why don’t most people have a written investment plan?

The reason for having a written plan is that it requires you to think carefully and work out for yourself the answer that’s best for you.

A plan isn’t really good if it hasn’t been checked out with somebody else, ideally your spouse. A second opinion is very valuable.

To what extent have index funds been lucrative for advisors?

It depends whether they’re getting paid by means of kickbacks from the managers, which means they have to [hire] active managers with high fees that can afford kickbacks.

If you want to give really good advice, indexing at low cost gives you some space for your own fee and shows your clients that you’re on the right track of helping them.

There’s no logical case for not using index funds. That may sound like a blunt statement. But I’ve been looking and looking, and writing people to give me a rational reason to not own index funds, but nobody has one.

Why do you believe that financial advisors are highly important?

They’ve gone up and up in importance. A couple of reasons: One is that the skills of advisors have gone up, so that they’re more acceptable as being really helpful than they were 20 to 50 years ago.

The second thing is that almost everybody needs a financial advisor on two different levels. One [concerns] developing a plan that’s based not on 60%/40% or some standard convention but rather on who you are specifically, what makes you as an individual unique.

The good plan starts with respect for all those differences. Each individual should have something that’s tailored to them.

What’s the second level?

Almost everybody needs someone to say, “Be steady on your plan. Don’t get shaken loose. I know what’s going on is scary in some ways, but stay on your plan.”

Or, if you think there’s a good reason for changing your plan, change it, but then stay with it.

Your plan should be something that you think would be valid for the next decade or longer.

“Investing for retirement is increasingly recognized as one of our nation’s most important and dangerous challenges,” you wrote in 2014. Why dangerous?

It’s dangerous because many people who get to retirement without a good plan didn’t get good financial advice but stayed with that plan — and they’re going to be really hurt by the inadequacies of their savings.

You used to be in the active management business. Correct?

I was the equivalent of a partner in Donaldson, Lufkin and Jenrette, the house that research built.

“The best long-term benefit of active investing is not just economic but also spiritual,” you wrote, in defense of active investing. It “has been [a reason] for lifting over 1 billion people out of poverty in just one generation,” you say.

How else is active investing spiritual?

I don’t mean it in the religious sense. What’s spiritual is: Are you happy with where you are [financially]? Is your family happy, particularly your spouse? Do you feel good about things?

To me, that’s spiritual.

Why did you change from active management to being a strong advocate of passive investing?

The world changed, and I changed. “When the facts change, I change my mind. What do you do, sir?” as John Maynard Keynes said. [Keynes is most often credited with that statement.]

The economy, the volatile market, pandemic, Russia’s attacking Ukraine — there’s an abundance of chaos simultaneously. 

Does that pose any new challenge to investing? No. But because we’re human beings, we still tend to get more emotionally involved with up markets and down markets and with recent information rather than studying history, as we should. 

We’re too responsive to the short term, to daily newspapers, too responsive to what other people are saying and the way they say it.

We ought to be more coldblooded, independent-minded, rigorous in our thinking.

You have a new book, “Inside Vanguard,” due in October. Would you like to give us a preview?

I’ve known the principal people at Vanguard as long as there’s been a Vanguard. I was a director of and a strategy consultant to Vanguard. 

So I’m pretty much full tilt, and I had the rare privilege of interviewing every one of the people that made a significant impact on the development of Vanguard, including the people at Wellington, the largest single investment manager for Vanguard.

Is your book, then, an insider’s view with revelations?

Most people don’t really know or understand Vanguard. They think of it only as a low-cost mutual fund organization. 

That’s part of it. But it’s not anywhere near the whole truth.


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