Article Reviews

The Loser’s Game (1975)

I recently read a famous article The Loser’s Game written by Charles D. Ellis in 1975. This is one of the articles that kick-started the passive investing movement which continues today. Reading through the article and ignoring the dates, you cannot tell that it was written 40 years ago, as the content still rings true today.

There is actually a scorecard compiled by S&P for the Active vs. Passive debate, called the S&P Indices Versus Active Fund report (SPIVA). The most recent scorecard can be found here. To sum up, if one looks at a 10-year timeframe, generally more than 80% of funds underperformed their benchmarks. Active failed to beat passive even in inefficient markets such as small-cap or emerging markets, and also in the fixed income space.

Charles Ellis wrote a book titled Winning the Loser’s Game which is now in its 6th edition. His advice on how to beat the loser’s game in the 1975 article (and captured below) is probably somewhat outdated. His book would be a good place to get his updated thinking on winning the loser’s game.

Investment Management Is a Business, Not a Profession

  • The investment management business (it should be a profession but is not) is built upon a simple and basic belief: Professional money managers can beat the market. That premise appears to be false.

In a Loser’s Game, the One Who Loses Less Is the Victor

  • Winner’s Game
    • The victor wins the game by winning more points than the opponent (e.g. pro tennis).
    • Errors are seldom made.
  • Loser’s Game
    • The loser loses the game by losing more points than the opponent (e.g. amateur tennis).
    • Errors are often made.
    • Strategy for winning is to avoid mistakes, be conservative, keep the ball in play, let others blunder their way to defeat.

Competition and Active Management Costs Make Beating the Market Difficult

  • To perform just as well as the market, the institutional investor needs to overcome transaction costs of high turnover, management and custody fees, on a sustained basis.
  • In 1975, 85% of professionally managed funds underperformed the S&P 500 over the 10 years.
  • In 2014, 86% of active large-cap funds underperformed their benchmarks, 89% of those fund managers underperformed over the past 5 years, and 82% underperformed over the last 10 years.

How to Win the Loser’s Game

  • Play your own game, know your policies very well and play according to them all the time.
  • Keep it simple, do the things you do best, and do them over and over again.
  • Concentrate on your defences, focus on your sell decisions to reduce losses.
  • Don’t take failure personally.



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