As we come into the end of 2015, volatility is back in the equity markets and near-panic conditions exist in some parts of the high yield market. Active managers are likely to under-perform again this year. With this confluence of factors, it seemed appropriate to look back at Charles Ellis’s seminal work , Winning the Loser’s Game,
Ellis, a long time investment consultant, and an excellent author dives deeply into the market and whether or not it is even possible to achieve market beating performance.
Here are a few snapshots from his work:
- Four possible ways to beat market:
- market timing
- asset selection
- changes in portfolio structure/strategy
- long-term investment philosophy
- For most investors the most important thing is to be invested.
- Paradox – Funds are often being managed with their purpose and objectives being misaligned on the time dimension
- Appropriate investment policy can therefore be the most important way to achieve superior investment results
- 6 questions any investor should ask before selecting a manager
- What are the risks of an adverse outcome?
- What are the emotional reactions to an adverse outcome?
- How knowledgeable is the investor?
- How important is the portfolio to the overall financial position?
- Legal restrictions?
- Any unanticipated consequences that could arise from fluctuation of value?
- “time is archimedes’ lever in investing.”
- the real risks in the long run are the risks of inflation and excessive caution
- the great secret for success in long term investing is to avoid serious losses
- policy is the most effective antidote to panic
- Policy is to establish useful guidelines that are appropriate for your objectives and the realities of the markets
- First understanding of your objectives and tolerance for risk
- spending decisions should most definitely be governed by investment results
- problem definition and problem solving should not be delegated to investment managers
- “don’t confuse brains with a bull market”
- a few simple tests of investment policy
- Is the policy carefully designed to meet your real needs and objectives?
- is the policy written so clearly and explicitly that a competent stranger could manage the portfolio and conform to your intentions
- would you have been able to sustain commitment to the policies during the markets we have experienced over last 15, 20, 30, 50 years?
- would the manager have been able to maintain fidelity over the same periods
- would the policy have achieved our objectives?
- Managing managers
- believes in concentrating with 1-2 managers
- know your objectives
- do not expect more than they can deliver
- select based on competence