Speaking from Experience: Charles Ellis

Charles Ellis is a legendary financial consultant who advises institutions and governments around the world on investing. For many years he chaired the investment committees at both Harvard Business School and Yale School of Management, and he also chaired the CFA Institute, the global association of investment professionals. Mr. Ellis is a graduate of Yale and earned his MBA from Harvard and his Ph.D. from New York University. He is the author of many books on investing, including the widely acclaimed Winning the Loser’s Game.

Mr. Ellis was recently the featured guest on the television show Consuelo Mack WealthTrack. Below is a sampling of his words of wisdom for investors from that interview.

On index investing:

“Well, let me give a little bit of personal history because I’ve been in this game for 50 years, and when I first got started, I was absolutely determined I was going to find the stocks that we should buy at the price and make some real money. And I remember calling and telling my dad, ‘Dad, this is something you really ought to do.’ And I would talk to my friends, ‘Don’t you think we ought to do this?’ And over the years – and I don’t say this with any kind of pride, no kind of satisfaction, it’s in fact a very sad story – over the years, most of my friends have been triumphant and then not. And over time, their records individually across a wide spectrum – and I’ve worked with people as a consultant on investing in the United Kingdom, in Germany, in Canada, in Australia, New Zealand, in Japan, and all over the United States – and I can tell you with very few exceptions, they all would have been better off if they had indexed. And I say very few exceptions. Yes, Warren Buffett is one of the exceptions.”

“If I’ve spent fifty years looking all over the world for really good investors, and I found one or two, and that’s it, and I found lots who looked fabulous and then they didn’t, instead of getting all grumpy about it, I just said, okay, all these smart people had a problem. What was the problem? They were surrounded with and competing with brilliantly talented people also. Everybody else works all day, works all night, studies things, has their own Bloomberg system, really cares a lot, really trying hard – they all are working hard, but they cancel each other out. It’s like having 5,000 people on one end of a rope and 5,000 people on another end of the rope and saying, tug-of-war, and see which of the 5,000 can pull the rope farther against the other 5,000? It’s a complete waste of time.”

Consuelo Mack: “It’s so interesting that even you, Charley Ellis, are indexing. You’re basically, you’re following your own advice.”

Charles Ellis: “Very strongly.”

On asset allocation:

“But there is real value to asset allocation by type of asset. For most individuals, that is stocks and bonds, period. They should not get into hedge funds. They should not get into private equity. They should not get in venture capital because those are areas in which if you’re really good at it, you’ll get customers so fast that you’ll have more money than you can manage, so you close the doors.”

“Commodities are not an investment. They’re a speculation. You’re speculating that the price will be changed and that somebody else will want to pay more. Sometimes that works. There are lots of times when people say, look, it did work, retrospectively. But the long-term record of investing – of commodity speculation – cannot be considered investing because it doesn’t have any economic productivity to it. Now you can buy a painting and the painting can be higher in price later or lower in price. You can buy gold, and it could be higher or lower. But over long periods of time, it doesn’t pay off.”

On the biggest risks to investors:

“Well, the biggest blunder that we have seen in the last couple of years is very clear: November, December, January, February, March last year, it was really horrible. People were scared. Now what they were experiencing was a short-term severe pain, and they could convert that into a long-term severe pain by a very simple action: sell that stuff. Let’s get out of the market. And then the market goes vooop, and they’re not there. And that loss went from temporary, short-term, small part of your time period, diversification over time, to a forever big loss.”

“Panic selling’s the worst. Optimistic buying is the second worst – chasing things. ‘I heard him; I’m sure it’s going to work.’ And borrowing money to do that is the worst of the worst on the upside. So if you take those two out of your life system and you say, if it ever is true that the things that I own are going way down, way down, way down, I’m not going to sell, I’m going to actually buy more.”

“First thing is anybody who is in retirement should recognize is that the biggest risk they have is living longer than the money will last.”