economics

This could have been a good book in that the author has some very valid points. However both he and the editors at McGraw-Hill were quite lazy.

The book was originally written in 1985 with a target audience of professional investment managers and their large clients, such as pension funds and endowments. This 1998 edition was purportedly written for individual investors. Quite frankly, other than chapter 14, "The Individual Investor", it would be hard to tell that there was a change. Even this chapter is repetitive of previous material, including some of the same quotes.

The book is also padded beyond tolerance... in-page large-type quotes from the material in the chapter, numerous blank pages (30, 58, 70, 82, 112, 126, & 134), the same information recast as different tables & charts, and it still only manages to come to 137 pages. It's not clear why McGraw-Hill thinks it's worth [so much]. It's basically a long magazine article.

In addition, my experience is that McGraw-Hills editors have a real editorial quality control problem and it's most egregious in this book in the footnotes. For example: on page 40 the text refers to the "real" risk-free return as being before inflation and then the footnote to that text refers to "real" as being after being corrected for inflation; on page 55 the footnote purports to explain how 1.4 percentage points was calculated viz: "1.2 x 7 percent return on equities over and above the risk-free rate of return = 1.4 percent incremental return." (huh?); and (a nitpick, I know, but indicitive of their sloppiness) chapter 12 has two footnotes #3.

The author states that the book was written over an extended period in a social club in London and hotels and flights between Johannesburg, San Francisco, Chicago, Nairobi, Princeton, Maine, Bermuda, Vail, Boston, New York City, Atlanta, and his home. Perhaps if he had stayed in one spot it wouldn't have been so disjoint. The buying public deserves better.

Seventy-five percent of all fee-based managers under perform the market index against which they are measured. Nearly three-quarter of the actively managed mutual funds just equal or under perform overall market performance. Add to this a 1999 Dalbar, Inc. study that revealed the typical stock fund investor achieved less than half the returns of the un-managed S&P 500 index during the most recent bull market cycle. Houston, we have a problem! Charles D. Ellis' WINNING THE LOSER'S GAME (4th Edition) has a provocative investment policy message for investors: First, control your risk by deciding how much of your assets should be in stocks (versus bonds or cash). This allocation decision is the "single most important" investment policy decision you will make (and the biggest contributor to total return). Don't be a 'loser' by trying to beat the market. Profit by participating in its long term trends. Time is on your side, so load-up with equities if you have a ten year time horizon. Just look at the rolling periodic return charts for equities (pp. 74-75). Separate your functions as policy maker (viz., your goals, what you are trying to accomplish) and manager (viz., how the policy will be implemented). Do not confuse them. Stick to the policy plan to avoid the loser's game of over-managing your assets. Trying to time the market is just one way to play the loser's game: Just consider that missing only the thirty best (up) trading days over the past eighteen year bull market would have reduced an investor's annual compounded return from a market average of 18% to 11%. Stock picking as a strategy to achieve outsized returns is not reliable and leads to excessive trading costs. Regressing to index averages is a statistical reality for professional money managers, so why not consider an index fund/manager where operational costs and taxes that reduce returns are minimized. Trying to outperform the averages is ultimately a fool's game because so many talented people are trying to do it. Managers are competing against talented peers with no special advantage. Okay, the market may not be perfectly efficient. To be sure, market prices may be inflated or depressed in the short term affording money managers profitable opportunities, but the market is "sufficiently" efficient in time. Portfolio managers and investors who significantly outperform the indices are taking on more individual stock or group sector risk than time will reward. Note: WINNING THE LOSER'S GAME takes on a number of topics on which there is heated debate. Ellis' endorsement of indexed investments will be anathema to most investors. Large segments of the investment establishment justify their fees from disciplined strategies exploiting anomalies in the markets, or attempting to curtail losses in broad market declines. There are very many indexes available to investors in addition to the often referenced S&P 500, so which are the best ones to follow? Stockbrokers are dismissed by the author in a way that fails to account, among many other things, for their educational value to a growing investor class. Nonetheless, this is a book packed with insight...highly recommended.

This seems to be a book made out of an old but important magazine article. The target audience shifts between chapters, pages are left blank and unnecessary space is spent on charts. However, a useful analogy and deflating historical analysis make the point cleanly that passive investing in stock/bond funds is preferable to active mutual funds. And don't be tempted by picking stocks yourself.

Better values in the "passive" school of investing lie elsewhere, such as in Malkiel's "random walk" book.