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Beating the Market or Winning the Loser’s Game?

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

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