, Editorial Director
If there is one book I would like to give to every 401(k) plan participant as the new year begins, it is "Winning the Loser's Game," by Charles D. Ellis.
Many Pensions & Investments readers will recognize this as a classic of money management literature, first published in 1985 and revised in 1993.
Originally written for an audience of institutional investors, Ellis now has updated and revised the book, published by McGraw-Hill, New York, for an audience of individual investors, making it more pertinent to their concerns.
However, it remains a compendium of common sense for any investor, individual or institutional.
Mr. Ellis' thesis, first expounded in an award-winning article in the Financial Analysts Journal in 1975, is that investing is a loser's game, not a winner's game.
A loser's game is one in which the outcome is determined by the actions of the loser. The loser defeats himself or herself by making more errors than the winner. In a winner's game, on the other hand, the outcome is determined by the actions of the winner.
Mr. Ellis cites professional tennis as an example of a winner's game. The outcome is mostly determined by the winner winning points, for example, by strong serves or passing shots. Amateur tennis, on the other hand, is a loser's game. It is won by making fewer mistakes than the opponent.
Investing has become a loser's game, Mr. Ellis says in his book, because for any one manager to outperform the other professionals, he must be so skillful and so quick that he can regularly catch other professionals making errors -- and can systematically exploit those errors faster than other professionals can.
"It was one thing a generation ago when the aggressive professionals were few and did less than 10% of the buying and selling," he writes. "The professionals were in a happy minority. They had lots of `targets of opportunity'." Now, he notes, 90% of the trading is done by professionals.
The key to successful investing, therefore, is to make fewer mistakes than most other investors, and in 138 brief, readable pages, Mr. Ellis shows how to do that.
The key, he argues, is establishing and adhering to appropriate investment policies over the long term -- policies that position the portfolio to benefit from riding with the main long-term forces in the market. No one can do it for the individual, although others may help and guide.
But only the individual understands his or her own circumstances and risk tolerance well enough to devise an appropriate investment policy. Mr. Ellis provides a list of questions to guide the investor to an appropriate investment policy.
He goes on to examine the importance of time, the measurement of return and risk, the building of portfolios and how to live with losses. In every chapter are pearls of wisdom.
For example: Don't change your investments just because you have come to a different age. "Investing should always be done for investment reasons and not for personal reasons," he writes.
Most investors, he notes, have long time horizons, stretching 20, 30, even 50 years. They should take advantage of that, and the power of compounding.
Yes, this book should be in every 401(k) participant's enrollment kit.