On October 5, I led a live discussion with Charles D. Ellis, the pioneer and evangelist for passive investing in equities and author of Winning the Loser’s Game on the Terminal. As he made clear in the discussion, he is very, very dubious about the wisdom of investing in bonds, and suspects that the best chance to profit from investing in venture capital or private equity has now passed.
He also provided some fascinating new insights on just how David Swensen, who died earlier this year after a spectacularly successful career at the head of Yale University’s endowment, found managers of private assets who could outperform for him. It wasn’t easy.
Here is the transcript.
10/05 10:37 ET
Welcome to Authers Notes, TOPLive’s blog-based discussion of some of the most influential books about investing, finance and economics hosted by Bloomberg columnist John Authers. This time around, John’s guest is Charles D. Ellis, founder of Greenwich Associates and author of Winning the Loser’s Game. Now in its eighth edition, Ellis’s work has informed the thinking of countless investors and investment professionals in the decades since it was first published.
Andrew Dunn, TOPLive Editor
10/05 11:33 ET
Hello and welcome to our discussion of Winning the Loser’s Game, an investment classic that has been required reading for budding CFAs for decades, and this year reached its eighth edition.
We’re very grateful to Charley Ellis for giving us the time to talk about this, and also to the many readers who have submitted questions in advance.
The opinions expressed by the panelists are their own.
John Authers, Bloomberg Opinion, New York
10/05 11:35 ET
In brief, “Winning the Loser’s Game” offers the classic case for indexing as opposed to active management. With more and more money managed professionally, and with institutions devoting ever more resources to looking for the best performing stocks and bonds, the market becomes ever more prohibitively difficult to beat.
The title comes from an analogy with tennis. Roger Federer, Serena Williams and the greats play a “winner’s game” in which they come up with just the right shot that touches the line but stays in, and win their points; most of us play a “loser’s game” in which the winner is the one who makes fewer mistakes, and we are best advised just to try to make sure that we can get the ball back over the net.
Similarly, Charley argues, investing is now a game of avoiding mistakes—and that means a steady asset allocation and using indexation to minimize fees, rather than make any active attempt to beat the market.
John Authers, Bloomberg Opinion, New York
10/05 11:37 ET
Beyond the argument for indexing, however, the book also leads to arguments for a very active approach in private markets, where there is more of a chance that an investor can find an edge.
The founder of Greenwich Associates, Ellis worked with some of the most influential investors of their generation—including Jack Bogle, the founder of Vanguard, and David Swensen, who died earlier this year after several decades of spectacular success running Yale University’s endowment. While there, he pioneered investing in alternative assets such as venture capital, hedge funds, and even forestry.
This live blog gives us a chance to talk both about how private investors should manage their money using indexes, and how big institutions with long time horizons can venture into much more esoteric territory.
John Authers, Bloomberg Opinion, New York
10/05 11:39 ET
Joining our discussion today is Bloomberg’s Janet Lorin.
Janet has been writing about various aspects of higher-education finance, including college endowments, for almost 14 years at Bloomberg. She and a colleague shared a George Polk award for national reporting for a series about student debt.
Andrew Dunn, TOPLive Editor
10/05 11:40 ET
Now for the questions....
One reader asks the following, which strikes to the heart of current complaints about indexing:
“If one invested in a World or All-World equity index at present, one would get a strong representation of U.S. shares, which have an exceptionally high CAPE, and within that a strong representation of the S&P 500 and of the rather few shares which dominate the S&P 500. Some respected commentators, notably Jeremy Grantham and Rob Arnott, would not recommend such an allocation. Is it really a good idea?
Put differently, indexing means accepting the market’s judgment about the appropriate valuation to put on companies. If the market is already overpricing a company, does this not help to create bubbles? And is there an argument for “Smart Beta” or “Fundamental Indexing,” (as Arnott calls it) which weights stocks by a measure other than their market cap?
John Authers, Bloomberg Opinion, New York