What are some of the forces?
One is volume of trading. When I first got to Wall Street in the early 1960s, 3 million shares a day was a huge day. Now it’s 6, 7, 8 billion shares. Another [factor] is that everybody knows everything today because all they have to do is go to a Bloomberg terminal and punch it out. And the SEC has said that if you’re a publicly listed company and give anybody information that might be useful, you must make a diligent effort to be sure everybody in your investment group gets the same information at the same time.
Is the manager’s mission to beat the market the root of the active management issue?
Hope is a very important part of all of us. There are certain things about human beings that are quite wonderful but don’t happen to be economically helpful. We’re trained in most ways that trying harder is better, such as in the story, “The Little Engine that Could”: “I think I can. I think I can.” And [she] made it to the top of the mountain. But trying harder isn’t always [the best way]. With some things, it just doesn’t work.
In “Winning the Loser’s Game,” you write that “investing is not entertainment. Investing is a sober responsibility. Investing is not supposed to be fun and exciting.” Seems that during the pandemic, many folks who think they’re investing are really only in the market for fun and entertainment. What’s your take on that?
It’s true. And on average, they will have had very unfortunate results. The ramp-up of individual stocks in the last couple of months has gotten a lot of attention because it’s a unique phenomenon.
What did that entail?
People got excited about it, and some were very successful. So that got others excited. But nobody much reports, “Gee, I really lost some money. I’m so embarrassed.” The serious work of long-term investing, which is what investment advisors and professional investors are really all about, go past this kind of stuff and pay it no particular attention.
Why has indexing become so popular?
The amount of money that’s been moving year after year, after year, away from active investing and into indexing is stunning. There’s a very good reason for it: If you’re an investment professional wanting to guarantee to a long-term investor that they’ll get top-quartile performance, [you can tell them], “If you follow my advice and index, I can guarantee you’ll get top-quartile performance if you follow my advice, and I can do it for lower cost and lower fees than you’ve ever paid and with lower taxes than you’ve ever had. All you have to do is index, and you’ll be in the top quartile for 20, 30 years.”
You’re invested in index funds only with the exception of one individual equity. Please discuss.
Like a lot of people who are index-committed, every once in a while, on the side, I do a little stock purchase. It’s something [such] investors think is pretty damn interesting. For example, I’ve owned Berkshire Hathaway for 50 years — I’m happy with it. But I have to admit that I check the price of that stock almost every day. I might buy some more, but I certainly wouldn’t sell any.
“The first secret to success is to ignore the beat-the-market hype of brokerage firms, actively managed mutual funds and investment letters from stock market gurus working in cahoots with Mr. Market,” you write. In what way are they “in cahoots”?
It’s not deliberate or malicious. But if you’re a serious-minded long-term investor, what Mr. Market does isn’t good for you. His objective is to get you to do something. He doesn’t care whether you buy or sell. All he wants is for you to do something. Often he does all kinds of things to get your attention and take action. He likes to scare you sometimes. He likes to get you overconfident sometimes. Sometimes he likes to get you all excited about something. He’s always trying to catch your emotions so you’ll do something. Meanwhile, the dull workhouse economy plods along in its own particular way.
Who came up with the concept of the Mr. Market analogy?
Mr. Market was invented by that wonderful man, Ben Graham [“the Father of Value Investing”], whom I knew pretty well when he was in his 80s. He was terrific. He invented Mr. Market because he wanted to show people that there are two fundamentally different things going on in the market [simultaneously].
Last June, in an interview with me discussing the coronavirus pandemic, you predicted: “We’ll come out of this darkness in a very powerful way.” Are you sticking with that forecast?
Yes. There’s going to be a terrific amount of not-yet-satisfied demand. I don’t know anybody who doesn’t say, “I’d love to go to restaurants again or [travel to] see my children or grandchildren or parents again.” A lot of people haven’t shopped for things, like clothing — so they’re likely to restock their closets. About two-thirds of the economy has been pretty good at saving during the pandemic because they’ve kept working. Others have had a terrible time, and that’s a shame.
When will all the spending commence? This summer? In the fall?
That’s easy: Tell me when the plague will be over and everybody agrees it’s time to open up and go back to our past activities. As more and more people get their shots — and I hope they do — we’ll be able to bring down COVID-19.
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April 15, 2021 at 01:44AM
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Charley Ellis: 3 Reasons Active Managers Lose Out - ThinkAdvisor
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