Winning the Loser’s Game - Timeless Strategies for Successful Investing by Charles D. Ellis
Comments by Sharwan Goyal
January 2019

“Winning the Loser’s Game” by Charles Ellis takes a balanced, realistic view of the risks and rewards of investing. It is useful for individual investors who gets swayed by short term market moves and allow emotions to overrule rationality while taking Investment decisions.  Charles advised investors to focus on long term Investment objective and appropriate asset allocation (plays far bigger role than stock selection). He advocates passive investing given limited room left for active managers to make alpha in today’s times.

Active money management has turned from winner’s game to loser’s game:

In a winner's game the outcome is determined by the correct actions of the winner. In a loser's game, the outcome is determined by mistakes made by the loser. The active investing is at the margin always a negative-sum game. To achieve superior or better than average results through active management, you depend directly on exploiting the mistakes or blunders of others.

As the share of professional money manager’s investment to market capitalisation increases, the ability of professionals to generate Alpha diminishes as these smart investors compete against each other to beat the market. Alpha generation was easier in past as the amateur individual investors tend to underperform market given trait of being influenced by emotions over fundamentals. Alpha generation is a zero-sum game; with brokerages/taxes/management fees, disproportionate funds end up with negative alpha. For example, if a layman allocates equivalent amount of money across all the actively managed funds, he is expected to generate market returns but with a higher expense ratio his net returns tends to be lower than the market returns.

Investment objective is paramount:

The book cautions investors from deviating from their long term investment objective in the times of emotional swings caused from the market volatility. For most investors, market is a casino, they love the fun of betting on speculation but forget their long term objective of making consistent return. Like in a casino, when the players end up being losers and casino owner makes the most of money (Mr Market).

Learnings from the book:

• Whilst in US, active money managers are losing share due to consistent under-performance. However, In India, active investing may still have some way to go. This is because the share of active management to market capitalisation in India is far lower than developed markets.
• For an investor, portfolio objective should weigh higher than alpha generation. Sub-optimal allocation of funds in various asset class with timing mismatch to investor’s needs may hurt investor more than underperformance.
• Individual investors are not absolved from their responsibility of acting rationally when they allocate their wealth with professional money managers. Individual Investors tends to redeem in bear markets and increase allocation in bull markets. This emotional trait eats into an individual investor’s total return.