Charles Ellis founded Greenwich Associates, which for 40 years has effortlessly persuaded the superstratosphere of the financial world to buy its unique consulting services. He retired from Greenwich years ago, but keeps his hand in. He has written at least a dozen books, and all the ones I have read were truly memorable (I bought three more as I wrote this piece). Until recently, he was the chairman of Yale Investment Committee, a $20bn fund which has earned 14 per cent a year for 20 years.
Which is all somewhat contrary since Ellis's original and perhaps still most important claim to fame is his concept of 'The Loser's Game', characterising investment as a pursuit in which the results are determined by mistakes. He drew on someone else's ingenious analysis of tennis. Now this is important, so read this twice: most points in tennis are clearly won by sheer skill or lost by a frustrating mistake. The winner of the first type of point is a winner in every sense. But the winner of the second type of point owes it to his opponent's mistake. His superiority probably lies only in being less prone to making mistakes.
When played by professionals, tennis is a winner's game in the sense that superior skill determines the outcome. But when everybody else plays, most points are decided by errors. The loser determines the result by throwing away more points than the winner. This then is a 'Loser's Game'. And that's how Ellis has viewed investment since the earliest days of Greenwich - even investment played by professionals: "The secret of winning is to lose less than the others." If you don't understand this proposition, you should take a long hard look at yourself.
It wasn't always thus, he says. In the 1950s and 1960s, investment management was a backwater in which hard work, inspiration and insight could deliver superior returns. But as it became a bigger and richer business, it drew in a huge number of hard-working, inspired and insightful professionals. By the 1980s, that description fitted pretty much everyone in the business. Further, "company information and rigorous analyses had proliferated, competitors had multiplied and information once seen as a competitive advantage had become commoditised".
It was therefore no longer possible to succeed by winning. Not in the long term, at any rate. In the long term, all but the tiniest fraction of investment professionals could only distinguish themselves by losing less than their peers.
Now don't go and jump off a cliff. Instead, read Charles Ellis's book, 'Winning the Loser's Game', which is definitely one of the all-time best investment reads. That would be an excellent Christmas present and I have organised a special offer for you*. It's beautifully written and contains profound insight for everybody. But, as a taster, perhaps you should have a look at the Orient Express article, in which Ellis pursues his trademark theme of underperformance by institutionally managed funds. Who is responsible? he asks.
It's very easy of course to turn on the investment manager himself but - just as on Agatha Christie's Orient Express - deep suspicions land on all the other people in the room. For anyone not privy to the world of pension funds and trusteeship - and probably even more so for those who are privy - the article provides a fascinating analysis of the who and how of decision-making in this area.
Step forward the investment consultants. They're the people who help trustees appoint fund managers. These firms - such as Mercer, Hewitt, Towers Watson and Oliver Wyman - are very profitable, although they stay very niche and rarely come into public view. Well Charles Ellis thinks they are simply too conflicted (mainly by their profit margins) to offer the advice their clients need. See how they consistently advise hiring fund managers "after their best years" and fire them "after their worst years" thereby indicating a flawed belief that the past is a guide to the future.
Fund executives - operational staff who support fund trustees - are in Charles Ellis's experience, "set up to be overwhelmed… by the socially dominant hunters" who bat for investment managers. If only they were made of sounder stuff. But their failings are probably modest with those of investment committee members who persist in believing that a) performance data can predict future results, b) their role is to select top-quartile managers and c) they are not victims of groupthink.
So who is guilty for investment underperformance? For the answer and an Agatha Christie-esque twist, read the piece at cfapubs.org/loi/faj.
*£13.90 including UK delivery from Harriman House: 01730 233870.
