Now in its sixth edition, this book by Charles D.

Ellis is undoubtedly one of the true classics in the

genre of sensible investing. It is right up there with Burton Malkiels A Random Walk Down Wall
Street and William Bernsteins The Four Pillars of Investing.

The author of 14 books and a PhD. Graduate of New York University, Ellis was a managing partner of
Greenwich Associates for thirty years, the international strategy consulting firm he founded that
serves virtually all the leading financial service organizations around the world. He is a past trustee of
Yale University and Chair of its investment committee. He was also a director of The Vanguard
Group, and he currently is the Chairman of the Board of the Whitehead Institute for Biomedical
Research, a leading institution in the field of genomic research. Dr. Ellis is frequently called up to
consult on investing issues with major institutions around the world. In other words, when Charley
Ellis talks, people listen.

The title of this book refers to a famous article that Ellis wrote in 1975 titled The Losers Game which
states that investing is like amateur tennis. It is a losers game, whereby a player loses the game
based on how many mistakes he makes relative to his opponents. Investing is a losers game, and
he who makes the fewest mistakes will win over the long run.

His innovative book was a solution to the losers gameshifting away from working ever harder in a
futile effort to beat the market to a winners game of concentrating on the big picture of long term
asset mix and investment policy.

This is especially applicable to the nearly 50 million individual investors in America. First, these
individuals are on their own in designing long term investment policies. Second, few experts can
afford to allocate time to provide the counseling individuals needed at a reasonable fee. Finally, the
industry thrives and sells on the false promise that the typical investor can beat the professionals, the
market return notwithstanding.

His conclusion is startling: successful investing does not depend on beating the market. The simple
and more productive task is to design a long-term program that can succeed at providing the best
feasible results in the long run.

Investing in a perfect world is a zero sum game. On average, all investors make the market return
before costs. Therefore, the assumption that most institutional investors can outperform the market is
demonstrably false. It is impossible for them to outperform themselves.

It turns out that investing with and like the professionals is a losers game. Trying to beat the market
generates frictions and costs. Once you subtract the cost of active management, such as fees and
commissions, they no longer even match the market, but the market is beating them. The outcome is
determined by the actions of the loser, who defeats himself! The key point is that the professionals
are competing in a highly efficient market where the current price reflects all available information.
Regarding the individual retail investor, he has no basis to believe that he can beat the professionals
at their own game, particularly when they themselves are getting beaten by the market? If all
investors could play and win the losers game by themselves, then there would be no demand for
professional money managers. Somehow, that just doesnt seem very likely, or else those
professionals would have gone out of business by now. If you like Walter Mitty still fantasize that
you can and will beat the pros, youll need both luck and prayer.

The solution is to play the winners game instead of the losers game. Playing the winners game
ensures that you can make smart decisions. The winner aims to capture his fair share of the readily-
available returns offered by the American (and global) capitalism pie via index funds which minimize
frictions and costs that take bites out of the pie.

Like all the wise people of investing, Ellis reminds us that risk and return are not just simply related
but they are joined at the hip. Demanding a higher expected return requires that you take on higher
risk. One of our favorite quotes from Ellis is: There are three kinds of investment risk. Two can be
virtually eliminated. The third, market risk, must be managed. A good advisor will add value by
determining the level of risk an investor can assume in order to achieve the returns that are available
to her. This is accomplished via the investment policy statement which spells out the risk and return
objectives, providing a road map to reach a destination such as retirement or funding education
expenses. Ellis refers to the investment policy statement as the most effective antidote to panic
which is a destroyer of future returns.

Ellis uses the coin-tossing analogy to explain why so many investors get hoodwinked into paying high
fees for active management. In the long run, coin tossers average 50% heads and 50% tails. In the
short run, some will appear to be much better than average at tossing heads. The short term results
may appear to skill on the part of the coin tosser, but it would take many years of measurement to
determine if the portfolio managers superior results were luck or skill. Unfortunately, there are many
studies such as the Standard and Poors Persistence Scorecard which show that managers past
returns are terrible predictors of future performance.

Although individuals should not play the losers game by hiring active managers or trying to be active
managers themselves, they still ought to learn how to live with losses. Short term losses are an
unavoidable reality on the path to long term gains. In order to reap the rewards of investing in
capitalism, investors must be willing to endure losses from time to time.

Ellis warns us about another unavoidable pie-destroying monster, inflation. The only way to grow our
pie is to invest in assets which produce a sufficiently high rate of return which can outpace inflation.
This usually means equities and real estate investment trusts.

Finally, Ellis admonishes investors to beware of their own worst enemythemselves. Individual
investors possess behavioral tendencies which lead them to buy when prices are high and sell after
they have declined. As Ellis explains, the problem is not in the market but in ourselves. From 1982 to
1997, mutual funds averaged approximately 15% in annual returns, but mutual fund investors
captured only 10%. Other studies that we have reviewed such as the Dalbar study suggest that the
returns received by investors are actually a great deal lower.

As with the movie War Games, the only winning move for the losers game is not to play. Instead, play
the winners game of buying, holding, and rebalancing a risk-appropriate portfolio of globally
diversified index funds. If you need assistance in finding the right portfolio for you, please take ourRisk
Capacity Survey or call us at 888-643-3133.