Losing the Losers Game – PFP Wealth Management

“The  first  panacea  for  a  mismanaged  nation  is  inflation  of  the  currency;  the  second  is  war.  Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” – Ernest Hemingway.

“Recovery in sight, says departing Bank of England governor Mervyn King..” – The Daily Telegraph.

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In one of the most powerful and memorable metaphors in finance, Charles Ellis, the founder of Greenwich Associates,cited the work of Simon Ramo in a study of the strategy of one particular sport: ‘Extraordinary tennis for the ordinary tennis player’. Ellis’ essay is titled ‘The loser’s game’, which in his view is what the ‘sport’ of investing had become by the time  he  wrote  it  in  1975. Whereas tennis is ‘won’ by professionals, the practice of investing is ‘lost’ by professionals and amateurs alike. Whereas professional sportspeople win their matches, investors tend to lose the equivalent of theirs through unforced errors. Success in investing, in other words, comes not from over-reaching, in straining to make the shot, but simply through the avoidance of easy errors.

Ellis  was  also  making  the  point  that  as  far  back  as  the  1970s,  investment  managers  were  not beating the market; rather, the market was beating them.
This is a mathematical inevitability given the  crowded  nature  of  the  institutional  fund  management  marketplace  and  the  impact  of management fees on end investor returns. Ben W. Heineman, Jr. and Stephen Davis for the Yale School of Management asked in their report of October 2011, ‘Are institutional investors part of
the problem or part of the solution ?’ By their analysis, in 1987, some 12 years after Ellis’ earlier piece,  institutional  investors  accounted  for  the  ownership  of  46.6%  of  the  top  1000  listed companies  in  the  US.  By  2009  that  figure  had  risen  to  73%.  That  percentageis  itself  likely understated  because  it  takes  no  account  of  the  role  of  hedge  funds. Also  by  2009  the  US institutional landscape contained more than 700,000 pension funds; 8,600 mutual funds (almost all of  whom  were  not  mutual  funds  in  the  strict  sense  of  the  term,  but  rather  for-profit  entities); 7,900  insurance companies; 6,800 hedge funds; and more than 2,000 funds of funds (the horror ! the horror !)

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