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Charley Ellis: Active Managers Take 100% Of Your Gains
Thank you for posting this alert on yet another Charles Ellis short research paper extolling the virtues of Index investing.
You asked “If Haystackers (Indexers) are so right, why do they spend so much time trying to prove it.”
Part of an answer is that Indexers are not always “so right”. Yes Indexing outperforms a major fraction of actively managed mutual funds, but not all. There are environments when active managers do quite well.
But it is true that these periods of relative advantage have become shorter in duration, more difficult to predict along the time dimension, and much more difficult to identify who will be the winners.
Ellis and Michael Mauboussian believe that one contributing factor in this complex equation is the advancing skill level of the institutional and professional players. If outcomes are determined by a combination of skill and luck, as skill becomes more equalized, luck becomes the dominant factor. And nobody foretells luck.
Also, there has been a sea change in terms of who investors trade against. In yesterday’s market, individual investors mostly traded with each other, so pricing anomalies were produced more often than in today’s marketplace. That’s because today’s transactions are dominated by professionals battling professionals in 90% of the instances. Pricing mistakes are rarer.
Even given the rising popularity of Index investing, it is still a small percentage of Wall Street activity. Much of the recent gains is due to Institutional participation at a higher level.
Many individual investors are ill-informed, are misdirected by financial outfits, are slow learners. Therefore, the “beating of the drums” is necessary to engage the general public’s attention. And advertisers have learned that that message must be repeated again and again and again and……. McDonalds and Fidelity have both learned that lesson well.
Yes, Charles Ellis is now a hired gun, but I believe he came to his current investment philosophy honestly by research and by experience. His studies and opinions are to be trusted and to be given considerable weight when assembling a long-term portfolio. A long time ago, he warned us to the dangers of the Loser’s Game, and later produced a book of strategies to win at that game.
When Charles Ellis speaks, I listen(I've heard this before, but it is more appropriate when applied to Ellis).
Comments
Thank you for posting this alert on yet another Charles Ellis short research paper extolling the virtues of Index investing.
You asked “If Haystackers (Indexers) are so right, why do they spend so much time trying to prove it.”
Part of an answer is that Indexers are not always “so right”. Yes Indexing outperforms a major fraction of actively managed mutual funds, but not all. There are environments when active managers do quite well.
But it is true that these periods of relative advantage have become shorter in duration, more difficult to predict along the time dimension, and much more difficult to identify
who will be the winners.
Ellis and Michael Mauboussian believe that one contributing factor in this complex equation is the advancing skill level of the institutional and professional players. If outcomes are determined by a combination of skill and luck, as skill becomes more equalized, luck becomes the dominant factor. And nobody foretells luck.
Also, there has been a sea change in terms of who investors trade against. In yesterday’s market, individual investors mostly traded with each other, so pricing anomalies were produced more often than in today’s marketplace. That’s because today’s transactions are dominated by professionals battling professionals in 90% of the instances. Pricing mistakes are rarer.
Even given the rising popularity of Index investing, it is still a small percentage of Wall Street activity. Much of the recent gains is due to Institutional participation at a higher level.
Many individual investors are ill-informed, are misdirected by financial outfits, are slow learners. Therefore, the “beating of the drums” is necessary to engage the general public’s attention. And advertisers have learned that that message must be repeated again and again and again and……. McDonalds and Fidelity have both learned that lesson well.
Yes, Charles Ellis is now a hired gun, but I believe he came to his current investment philosophy honestly by research and by experience. His studies and opinions are to be trusted and to be given considerable weight when assembling a long-term portfolio. A long time ago, he warned us to the dangers of the Loser’s Game, and later produced a book of strategies to win at that game.
When Charles Ellis speaks, I listen(I've heard this before, but it is more appropriate when applied to Ellis).
Best Wishes.