The noted author, consultant, and academic on the virtues of simplicity, the challenges facing active managers, and why he would stay away from investing in private capital.
“Charley Ellis: Why Active Investing Is Still a Loser’s Game,” The Long View podcast, Morningstar.com, May 27, 2020.
Rethinking Investing: A Very Short Guide to Very Long-Term Investing
Winning the Loser’s Game: Timeless Strategies for Successful Investing
“Stock Pickers Are on a Record Run With Investors. Don’t Be Fooled, Says Index Fund Guru,” by Jason Gewirtz, cnbc.com, Feb. 14, 2025.
“Investment Costs Make a Huge Difference,” by Robin Powell, ifa.com, Feb. 17, 2025.
ETF Edge interview with Charley Ellis, cnbctv, Feb. 10, 2025.
Thinking, Fast and Slow, by Daniel Kahneman
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Christine Benz: Hi and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar.
Benz: Today on the podcast we welcome back Charley Ellis, whose latest book is called Rethinking Investing: A Very Short Guide to Very Long-Term Investing. Charley founded investment consultant Greenwich Associates in 1972. His seminal book about the benefits of passive investing, Winning the Losers Game, is in its seventh edition. Charley has also authored or co-authored books about investment policy and strategy, the retirement system in the US, and large investment firms, including Goldman Sachs and Capital Group. He has taught investment management courses at the Yale School of Management and Harvard Business School, and was the successor trustee of Yale University, where he chaired the university’s investment committee with David Swensen. He also served on the board of directors at the Vanguard Group. Charley was awarded the Graham & Dodd Award of Excellence from the Financial Analyst Journal and is one of only 12 people recognized by the CFA Institute for Lifetime Contributions to the Investment Profession. He received his undergraduate degree from Yale College, his Master of Business Administration from Harvard Business School, and his doctorate in financial economics at New York University.
Charley, welcome back to The Long View.
Charley Ellis: Glad to be back.
Benz: Well, we’re glad to have you here. We want to talk about your new book, Rethinking Investing, which Amy and I both have had a chance to read, and it is a nice, quick read, but it’s very dense and full of good information. Can you talk about your motivation in writing Rethinking Investing?
Ellis: Sure. I have had an unbelievably privileged life in terms of learning about investing. I spent 30 years as a consultant for Greenwich Associates working with the leading investment managers all over the world: Japan, New Zealand, United Kingdom, Germany, Canada, America. And in that time period, I became more and more aware of how complicated, fast-moving, and changing the investment world is and has been for some period of time. And then I spent time with individuals, some of them quite wealthy, some of them not at all wealthy, some of them young, some of them older. And it’s just amazing to me how many people don’t really understand what’s been going on to change investing as they challenge and change the way in which they might respond in a constructive way. And also, once you get into this sort of thing, you keep going. I have had the privilege of teaching the investment course a couple of different times—that’s a whole course, 31 different sessions at Harvard Business School. And I’ve done the same thing at the Yale School of Management. And working with students is a terrific way to clarify your own best thinking about investing. And then you and I have discussed before, I’ve had the privilege of writing quite a few books about investing and being helpful.
And there is nothing that melts me down than to have someone I’ve never met or heard of come up to me and say, “I read your book. It was really helpful.” So I’ve found myself following my dad’s advice: If you find a problem, find a solution. And I’ve been more than thrilled to have it all come together in a book that’s only 100 pages long. And it really lays out what people need to know. And if they will accept it and work with it, it gives them all that they need to know. So that’s my motivation for writing the book is public service may be a little bit highfalutin, but that’s the way I feel about it. And having had a privileged opportunity to learn things myself, I really want to share them with other people. And if it works for people—and the acceptance we’re getting for this book has just been terrific, because it is short, it is clear, and very, very helpful to people who make the time. In one afternoon, you can read the whole darn thing and really understand everything in it. There are no fancy charts. There are no complicated equations. There’s no Greek symbols.
It’s all very simple, straightforward language, and only 100 pages. So I almost called the book Eureka, because it all came together for me. After all these years, I finally realized there is a simple, straightforward solution for almost everybody. That’s my answer and I’m sticking to it.
Arnott: So one of the key concepts in the book is the idea of the power curve. Can you explain what you mean by that and why it’s such an important aspect of an investor’s success?
Ellis: It’s not sure to be a big source of success, but it can be. Because it’s up to the individual person. Most of us hear about compounding and we think, 5% interest compounds and over a long period of time, it really makes the difference. Yeah, that’s true. But if you think about compounding in the way it really works in the equity market, over a long period of time, the rate of acceleration of increase, the rate of growth goes up faster and faster and faster. And so I think of it as a power curve because it gains increasing power as you go through time. Simple. 1, double to 2, double to 4, double to 8, starts to get your attention, but then 8, double to 16, 16 double to 32, 32 to 64. Wait a minute. This is starting to really get interesting. 64 doubling to 128, and that could happen to you. If you will invest in a way that has a reasonably high rate of return, and you have plenty of time. Back to this little book, Rethinking Investing. For anybody who is really young, they have time that is simply marvelous. They’ll start investing somewhere in their 20s. They’ll still be investing somewhere in their 80s. That gives you 60 years, and you can compound quite a lot over 60 years. Then those last doublings that really have the greatest impact. So you got to start early, but if you will start early and stay with it, the compounding takes you on increasing power, increasing power, increasing power. That’s why I call it a power curve.
Benz: In terms of what to invest in, of course you are a big believer in index funds and in index investing. You make the point in the book and you made the point when we interviewed you previously that active managers are more talented than ever, you believe, but beating the index is harder than ever. Can you address that because on the surface it seems to be a little bit of a paradox?
Ellis: It sure sounds like a paradox, but when you get to the facts of what’s going on, if you just look at investing since I came out of business school in the early 1960s, in those days at the most 10% of trading was done by institutions. Now it’s over 90% is done by institutions, and the institutions have transformed themselves from being mostly rather sluggish, slow moving, day with the blue chips, try to hold for the long term, laddered bond portfolios, trust department, all over the country—we had 14,000 banks in those days, 14,000 banks, and they almost all had a trust department. Sometimes the trust department was one person, but that was the institutional market. Today the institutional market is dominated by hedge funds, which have supersmart people, unbelievable technology equipment, and access to worldwide sources of information instantaneously. That’s really different, but if the big changes that go from less than 10% to more than 90% is done by professionals—that makes a tremendous difference to the nature of the market.
And the market has gotten more and more and more skillful at doing what markets are supposed to do, which is define a fair, accurate price, where buyers and sellers agree, you know, that’s about the right price. That strengthening, the process of pricing has made it harder and harder for anyone—even though they’re getting better and better than their predecessors could have—harder and harder for anyone to keep up with the standards of excellence that are in that marketplace. And the standards of excellence in our equity marketplace or bond marketplace today are simply astonishing. And given how good the markets are at finding the right price, it makes it harder and harder for any individual, even these really superbright people, to do better at finding the right price than the market does. And that’s where the curiosity or the paradox comes into play. Yes, the markets are getting more and more skillful at doing what markets are supposed to do because of all the participants getting better and better, but because it’s so darn good, it’s very hard for any individual or institution to do anywhere near as well as the markets are doing at finding the fair price.
Arnott: So with all of the improvement that we’ve seen in price discovery, would you point to Reg FD, which has been in place for about 25 years now, as one of the reasons behind that? Or are there other factors that you would point to that have driven improvements in price discovery?
Ellis: Great question. And the right answer is you bet. Regulation Fair Disclosure or Regulation FD is the SEC’s regulation that no publicly owned company can offer information to any one investor that they don’t make a simultaneous effort to get that same information available to all investors. The obvious answer for the corporations is hold regular 800-number dial-in conference calls, usually once a quarter, and give everybody exactly the same information at exactly the same time. And that’s it. Years ago when I was first getting the investment management business, the whole game was about do your homework, then make a corporation contact and either the chief executive officer or the chief financial officer would talk to you. If you had done really good homework, they would talk to you much more candidly and openly and give you all kinds of information about plans for acquisitions, judgments on new products, technology developments that were making a difference, what they thought about individual competitors.
All kinds of really nifty information on the basis of which you could make a judgment that was better than the market was able to evaluate the company. That was wonderful for those who had the private meetings with the corporate executives, but it wasn’t fair to the other investors who were not let in on the game. And therefore I think the SEC regulation—everybody on a level playing field—has been really important in terms of the integrity of our markets. It was a very, very sensible decision to make and has resulted in making it so that everybody knows all the same things at exactly the same time and therefore you can’t get a competitive advantage.
Benz: When you look at the data on active fund performance, does performance notably decay after Reg FD? Have you looked at that phenomenon of whether the performance edge that active funds might have had abates when that regulation goes into effect?
Ellis: Now I think it has, the differentiation that people had been able to accomplish has gone down very considerably. And that’s actually a very good thing because it means the average decision-making has gone up and up and up and it’s more and more accurate. So that had been a terrific regulation that serves everybody who is playing fair really well. And I’m very glad we have it in our markets. And other markets around the world typically follow the US market with some lag. They’re all working in that same direction now, which is going to be good for investors generally everywhere.
Arnott: And what about on the technology front? You might think that institutional investors would have access to the best technologies, but you also write in the book over and over technology has been a great equalizer.
Ellis: Right. The technology advances have simply been astonishing. Now, for example, most of us have a cellphone in our pocket that has more computing power than the IBM 360 when it was the biggest deal in the computer industry a generation ago. That’s an astonishing reality. Almost all of us have access to the internet. Worldwide information flowing back and forth instantaneously all across the world, and very large numbers of people, hundreds of thousands of people, have access to Bloomberg terminals, which provide you any information you want, any time you want it in any format you want. So the technology side of things has gotten better and better and better and better at a rapid rate that is really something. We have better technology in the investment world than any other part of the society that we live in. It’s just astonishing what’s available to us. However, it’s available to everybody else too. And as a result, everybody knows everything at exactly the same time, worldwide.
And it’s a little bit like playing poker with all the cards face up. You know what the other guys know. They know what you know. How are you going to get a competitive advantage? Well, by being smarter. Are you sure you’re smarter than all those guys out there who are working so hard to get just right themselves? Yeah, you might be. Every day? No, knowledge is a variable. It’s going to get harder and harder. And as a result, the markets are better and better at getting accurate pricing. And that makes it harder and harder for any individual institution, or worse by a long shot, any individual to keep up with, after fees, costs of operations and so on, beat the market. And as you know, the data is awfully clear. We’re now somewhere around 85% to 90% of professionally managed funds, with all the skills they’ve got, fall short of the market rate of return. Usually by the amount of the fees and cost that they incur. But also if they fall behind, they tend to do a Hail Mary pass effort to catch up or get ahead. And that often works badly. So if you look at a slugging average on the negative side, when people fall short, they tend to fall short by more and more and more. Even the best mutual fund managers, when they fall short tend to scramble to try to catch up or to do better. And that tends to not work out.
It used to be years ago that the objective of anybody looking for an investment manager was to give a top-quartile manager. That’s the cinch today. All you do is have to use index funds and stay with it. And you will have the top half of top-quartile investment results. It’s terrific. And it’s a marvelous gift that the world has given to every individual that they could by indexing get very good returns.
Benz: So you write at length about investment costs in the book. And they of course are the major explanation for active funds’ underperformance relative to index funds. The book has an interesting history lesson about how it became the norm for investment managers to charge a percentage of assets rather than some other method. Can you discuss that for us, the history of how we pay for investment costs?
Ellis: Sure. Years ago, firm called Scudder, Stevens & Clark was trying to figure out what they should charge. The tradition had been that most trusts had been created by law firms and the law firms offered investment services as well as trust services. Scudder, Stevens & Clark was just an investment services organization. And the law firms have been charging by the hour, which made sense because lawyers charge by the hour in everything else they did. They did that for investment management too. Scudder, Stevens & Clark didn’t think that was really quite right because how do they decide when they spent time working on analysis of a company and their results are going to be used by several different clients or all clients. There couldn’t be a right way to do that hourly basis. So they thought, well, maybe we’ll do it as a percentage of dividends paid out. And they experimented with that for a while and then they realized, dividends come and go and stocks may get the stain dividend for a long period of time. When the stock is going down or the stock is going up, dividends tend to be much more stable. That’s not really fair. What we ought to do as a percentage of assets.
And they ought to be small. So they settled on 1% of assets. And that seemed to work from a client’s point of view and it seemed to work from Scudder, Stevens & Clark’s internal economics point of view. And that became the norm. The norm was not just 1%. It was only 1%. And everybody talked about only 1% as though it was really small. But over time, as the asset base of an investment manager got larger and larger, that only 1% got to be a bigger and bigger number. And as the markets got larger and more people put their savings into investments, the base of accounting got larger and larger and 1% of a very, very large number is a pretty big number. And it never changed. And people felt comfortable paying only 1%.
But then, if you don’t mind, Christine, I want to go a little bit into depth because it’s really a funny way to look at it. Only 1% of assets. Wait a minute. Wait a minute. Those are my assets. I brought the assets to you as an investment manager. And I took all the risks, too, by the way. So it’s all my assets, and I’m taking all the risk. And you’re charging 1% of my assets. I’m trying to come to you to get a return. What is that 1% of assets? How much of that is a percent of returns? Well, returns are 7% then it’s 15%. Wait a minute. I don’t use the word only when somebody charged me 15%. So wait a minute. Wait a minute. It’s actually worse than that, isn’t it?
Yes, it is. Because you’re supposed to do for me something better than the market rate of return. What do you charge as a fee as a percentage of the incremental return over and above what the market returns? Well, we don’t usually get asked that question. Yes, but I’m asking the question now. What do you charge for the benefit of having your investment management services of higher rate of return than the market gives? Well, we really don’t like to talk about that. I know you don’t like to talk about it, but I’m asking you the question and I want you to give me a straight answer. Well, OK, the answer is we charge more than 100%. You charge more than 100% for a service? Yes, the service we offer and hope to deliver would be not so expensive, but the service we actually deliver, the incremental return over and above the market rate of return, the fee is more than 100% of that. So let me see if I did this right.
I’m an investor and I come to you and the service deal that you’re going to make with me is I’ll put up all the money and I’ll take all the risk and you’ll get all the benefit? And that’s actually what’s been going on for years. Although nobody ever said it, nobody ever did the math, nobody ever advertised it. That’s what’s been going on for years. Along comes index funds and the index funds that are low fee. And there are index funds that aren’t low fee even though, but low-fee index funds allow you to get most of the return in the marketplace at a very small fee that covers the transaction expenses and the cut to the handling and is a very sensible value for money. People who become index investors, like me and like most of the professionals that I know, they tend to stay with that for a long, long time. Because it’s intelligent, thoughtful, sensible bargain to get all the things that go with index funds at a very low fee. And you look around and what’s the incremental value of somebody not indexing, but is active management? And the answer sadly is negative. Then that’s because the cost of being an active manager and the fees and the taxes reduce the return to the investor. And it will leave you stuck.
Arnott: Another interesting aspect of fees is that despite all of the fee pressure on mutual funds over the past couple of decades, if you’re working with a financial advisor, for the most part, people are still paying that 1% fee for investment advice. And that AUM-based fee has been pretty sticky and seemingly resistant to pricing pressures. Why do you think that is? And is there anything that could turn the tide there?
Ellis: Well, I’m trained as an economist. That’s where I did my PhD, where I spent most of my life so I’m very comfortable that markets behave differently when it’s based on individuals who only are dealing with their own particular situation. And when markets are across individuals and there’s real competition. Most people have an emotionally positive connection with their financial advisor. They believe their financial advisor is a really good guy or good gal. They believe that their financial advisor is really working for them and trying to be helpful to them. They know that their financial advisor knows a lot more about what’s going on in a marketplace than they know. They develop a personal connection. Most people feel very warm and friendly toward their financial advisor; would see their financial advisor as one of their best business or commercial friends.
It’s really a very, very impressive emotional connection. Most financial advisors can at least see their individual customers as perfectly OK people, not terribly informed, often anxious, looking for help. And they’ve got a pretty good connection with them, but they see them as a customer more than the customer sees the relationship as a commercial thing. The advisors tend to see it as very, very attractive commercial proposition. And they know that if they keep a client, the value of that relationship is not the fee paid each year, but the present value of a stream of future earnings to that individual. So it’s a very strong financial incentive to stay with it than to be a very good service provider and to be warm, friendly, and helpful to give people every opportunity to feel good about you. And an important part of the help that financial advisors deliver is to give people confidence or comfort that they’re doing basically the right thing.
The fee that’s being charged is remarkably high. And if you look at the fees, it’s a very profitable business when you get a fairly large number of customers that you’re serving at the same time. It’s remarkably lucrative activity and candidly a large fraction of the people who are financial advisors do it because the work is interesting, the clients are nice people, and the pay is terrific because there’s not very much opportunity for competition between financial advisors except for getting the client started. Once you get a relationship going, there’s very little prospect of somebody coming in and breaking up that relationship. It’s much closer to a marital relationship than many people realize. And it’s a very lucrative business and attracts people who are articulate, like to work with people, are informed about investing, and really like being in a service business, and like having a high income. Not sure that it’s a terrific bargain for the individual, and it does seem to me as you were implying in your question, it does seem to me to be very high price. And I would not recommend most people have a financial advisor on a continuing basis at 1%.
If you figure out how much that is over time, over 10 years, over 15 years, over 20 years, it works out to be a fairly large number. I think you’d do much better to hire an advisor when you’ve got a serious question on your mind and want to get a developed answer. Pay them substantially per day to work with you or per hour to work with you and then go about your affairs. That would be a much smarter way of doing the working relationship from the customer’s point of view than it would be to continue the present practice of paying, “only 1%” day after day after day after day, year after year after year, as a fee for services that may not be needed. On the other hand, many psychiatrists will tell you the fair fraction of their business is done with people who just like to have somebody they can talk to. And I think a fairly large number of people don’t realize how much of an expense, in fact, they’re incurring with investment advisors, and they enjoy the relationship. And who’s to take it away from them? I wouldn’t mind if they would reconsider the question themselves. I’m not going to tell them to stop doing it.
Benz: I think what advisors might say is that the AUM-based advisors might say, well, I’m in a position to keep my clients in their seats in that market environment like April of this year, for example, where it was feeling a little bit panicky for a lot of investors that the advisor is in the behavior modification business. What do you say to that as an argument for the ongoing stream of fees, the AUM-based fees?
Ellis: I think it’s an accurate description, perfectly fair. But it would be a good idea to be sure you remember how much of a charge you’re paying for that service. Is it a good value for you as an individual? For some people, it’s a terrific value. For some people, it’s candidly not much value at all. It depends on the individual and the advisor, but mostly the individual.
Arnott: We also wanted to talk about the section of the book that covers behavioral biases that people can be prone to. What do you think are some of the most common errors that people make, and what are the best ways to avoid them?
Ellis: Now, it’s a wonderful world of complexity and fun stories about other people and a little bit of embarrassment to realize, oh my gosh, I’m one of those other people, too. Alfred Marshall in the late 1800s laid out the basis for economics with a single principle that all people will naturally want to serve their own best interests. It turns out behavioral economists, particularly Daniel Kahneman, who wrote that wonderful book Thinking, Fast and Slow, have proven over and over and over again that people don’t act as rationally as Mr. Marshall thought they did or would. We’re actually somewhat irrational. And the irrationality tends to be on the optimistic side. So, for example, large majority of people would say that they are above-average drivers, above-average dancers, above average at being friends, above average at understanding other people. And you can’t have more than 100% of a crowd being above average. So, if the average is 50%, typically 80% of us think of how well we do as drivers, how well we do as dancers, how well we do at making love in a variety of different ways in which we see ourselves really much more positively than is realistic. The same is true for sure in the world of investing. We think we are better at investing than the average person. Eighty percent of us think we’re better than the average person.
It can’t be. The average person would be 50%. And we’ve got one after another after another characteristics where we see ourselves as being better than we could be, possibly, if you believe in mathematics. It’s good for us as a society because if people think well of themselves, it gives them a comfort, a pleasantness, and probably cheerfulness. That makes it nicer from the community as a whole point of view to have everybody feeling pretty good about themselves. In the world of investing, it’s dangerous. If you say 80% or 75% of us think we’re above average at choosing stock prices and making investment decisions or above average at understanding risk and taking risk appropriately, or a whole bunch of other characteristics, we’re going to be paying a terrible cost long-term relative to our own individual fortunes by being too optimistic about how talented we are and then piling back in to do more transactions based on that more optimistic view.
I’ve often asked, what’s the best book to read for investing over a long period of time? And then I have to silence it. Well, you’re asking me as a writer of books, an embarrassing question. I naturally say Rethinking Investing is terrific or Winning the Loser’s Game is terrific. But if you ask me for a book that I think would be really helpful, then I’d recommend Thinking, Fast and Slow, Daniel Kahneman’s Nobel Prize-winning book. Long book, but charming and fun, and full of one after other stories about how we delude ourselves into thinking we’re better than we are. And if you could get that into your thinking process as an investor, I think it would put you way ahead in terms of being successful long term. So that’s the way I would come at it. I’d recommend reading Dan’s book.
Benz: Have you seen any evidence to suggest that index fund investors are in better control of their timing decisions, that they’re less inclined to be rash and be chasing performance and doing some of the other bad things that we see investors do? Do index fund investors do better managing their emotions?
Ellis: Much better. Because of one curious anomaly, investing usually in individual stocks is interesting, often fun, sometimes terribly distressing, but very engaging. Index investing is boring. Being boring is wonderful because if you’re boring as an investment, you probably don’t get much of attention. If you don’t get much of attention, you probably are left alone to do whatever you do. And index investors fall right into that pattern of behavior. They do less. They don’t get as excited when the market goes up. They don’t get as excited when the market goes down. They don’t pay very much attention because they know it works. And it works over a long period of time. And actually, as I said, it’s boring. It’s just not interesting. And that’s a good thing for investors. I’m an index investor. Have been for years and years and years. And I often wonder why isn’t everybody an index investor? The cost is lower. The results are higher. And you don’t have to get excited about it one time or another, either positive or negative. It works really, really well.
Why doesn’t everybody do it? And then, as you may know from our prior discussions, I think that there’s a real reason. Passive investing is what’s usually called—and I think that’s a terrible disservice to the investors. Calling it passive is a negative term. I would hate to be described by my children as passive. I would not want my employer to think of me as passive. But if you look at it in history, indexing was developed by a group of engineers. Many of them were electrical engineers. In electrical, we use it all the time as a two- or three-hole plug on the wall. And as a two- or three-pronged at the end of a wire. And the active is the prongs. And the passive is the holes. And that makes for an electrical connection. If it always had been called index and never, ever used the word passive, I would bet we’d be at least 50% more investing in indexing than maybe more than that. I think sometimes semantics gets in the way of people doing the right thing. And this was one of those cases.
Arnott: What are your thoughts about the proliferation of exchange-traded funds, which often do have low fees and are index based, but you can also trade them intraday and many people seem to be using them as trading vehicles. Is that a negative or are people using index funds as a way to trade actively?
Ellis: I think you and I would disagree on what the actual behavior is. And I don’t know for sure whether you’re right or I am. But I think most people who use ETFs hold them for fairly long periods of time. And less trading is a good thing. And that’s the broad-based index fund-based ETFs. I’m very uncomfortable with small-based ETFs. A single industry, or worse than that, a single industry in a single company, or even just a selected group of individual stocks, too easy for people to misunderstand what’s going on behind those ETFs. They’re too small a sample to be broad-based. And that makes me uncomfortable. And I think does attract people who are “speculating” or guessing things on the basis of price behavior rather than on economic realities underneath the price behavior. But broad-based ETFs based on index funds, I think have worked out very, very well. And the reason I would be comfortable with them is that it’s very convenient to be able to do an action, if you ever have an action you want to do, whenever you want to do it. And that has increased confidence people have in doing investing of the kind that indexing and ETFs usually represent. So I think that’s been quite positive. I’m not at all enthusiastic about small sample or highly selected ETFs. I think that’s much closer to speculation on almost every case. They’re wonderful for expert investors who are trying to do highly precision transactions in order to manage their portfolios. But that’s what the superstars are doing. Great for them, but certainly not something I want to try to compete with them on, so I’ll stay away.
Benz: I wanted to ask you, Charley, about the push to get retail investors into private securities. Whether private equity or private credit, retail investors seem to really be getting the hard sell on privates recently. I’d like your take on whether you think that that is apt to be a good thing for smaller investors to venture into?
Ellis: I think it’s apt to be a mistake. When we look at the strongest version would be venture capital. When you look at venture capital and read about it in the newspapers, it’s wonderful. People make fortunes. It’s just terrific. And that’s just wonderful. But a very small number of investors, professional funds that specialize in venture are provided with capital from major universities typically, and other funds. That’s a very, very small group that make virtually all of the extra profits that go with venture investing. The top 10 or maybe 12 investment organizations whose funds make the investments on behalf of these universities typically, and they have done quite well. But the average venture investor has lost money over the last 10 years, over the last 20 years, over the last 30 years. The average loses money. So be careful.
You look at the average, you would say, I wouldn’t dream of doing that. You look at the very successful ones, you’d say, it sure looks like a great thing for me. You wouldn’t be allowed in on the large funds. They need to have clients or investor clients who make regular commitments to funds after funds after funds after they bring them out. A highly selected group of investors. Terrific. But for the rest of us, no. And I think anybody who’s thinking I might do private equity, for an example, as an individual, why are they coming to me? I don’t have a giant fortune. I don’t have the ability to be a big investor every two or three years. Why are they coming to me? And the answer is because they would like your money. And they’d like to make the profits that go with having your money. I would stay away from it. I know there’s some exciting stories that could be told. I know that sales pitches can be very, very interesting, but I’d stay away from it.
Arnott: In terms of other asset-allocation decisions, you argue in the book that you think people should think holistically about their asset allocations and factor in bond equivalents like social security and their homes. And it sounds like you think that a lot of traditional asset-allocation approaches might be overly heavy in bonds. Can you talk a little bit more about that?
Ellis: And I feel very strongly about this. Most people look at their securities portfolio as though it were in isolation, and it’s not. It’s in our context. And the context is all of the other assets and the incomes that you have. And for most people who are investors, if you look at the size of their 401(k) plan and the value of their Social Security when it gets claimed, but what’s it’s present value today is a big item. And their homes are usually a big item as well. If they would only think of those values, the home value and the Social Security value, as part of their total portfolio, they would, I think in almost every case, make a serious reconsideration, then reduce their bond portfolio substantially. And if there’s any one thing that I would love to see every individual do is take the whole picture: incomes that you haven’t yet received, but you’re going to get; Social Security that you haven’t claimed, but you will be able to; and value of your home. I know you’re not going to sell it. But someday somebody in your family, maybe your children, maybe your grandchildren, somebody in your family is going to say, you know, we really don’t want to live in that home any longer. We should sell it. It is an asset, and you should recognize it for the asset. It truly is.
If you did that, I think you would cut back on bonds substantially. The second thing, and I feel very strongly about this, but I recognize it’s a little bit of an ask—individuals should, I think, develop for themselves a spending rule. The spending rule that is an average—take the value of your portfolio for each of the last 10 years on your birthday or on your wedding anniversary or on the 4th of July, or anything you like. Each year, get the value, and then average that value and use that as the base upon which you determine how much you’re going to be spending. I think that would make a terrific difference. In my case, for example, I’m in my late 80s, late 80s, then if you ask me, well, Charley, how many bonds do you own? The answer is none. Have you ever owned bonds? Yes, I did. Back in 1963 for a year, I did own a bond. It was a convertible bond, but it was a very highly specialized situation where it was terribly mispriced.
Then it was a shoot fish in the barrel, kind of an opportunity, and I was young and full of beans. And so I did in a small amount own a bond. Ever since then, I’ve not owned bonds. Then I’m very glad I haven’t because I’ve been investing in a much higher rate of return kind of investment—stocks, index funds in particular. And that’s worked out really, really well for me. And it would for anybody else who took a long-term view of where they’re going. And if you start investing in your mid-20s and you are still investing in your mid-80s, that’s the long term, not the six months that the taxman talks about. It’s the 60 years, and you ought to take advantage of that long term to make a major difference in the rate of return in your portfolio.
And you can do that with comfort, if you look at the spending rule that averages over a period of time, 10 years is a nice convenient time period. Then you get spending that is stable. And that’s your bogey—consistent, stable earnings with a rising slope over time because your asset values are going up steadily at a really nice rate compared with bond portfolios. And I think people pay a terrific opportunity cost to say, I want to own bonds enough to make me feel comfortable with day-to-day price changes. Day-to-day price changes are going to happen for sure. And they happen up and they happen down and they happen all around dynamic markets. But that’s the short term. And if you’re an investor for the long term, the long, long term, you’ve got a terrific opportunity to think differently and to invest differently and to be invested in a way that really makes sense for the long, long run. Time for an investor should always be thought in terms of how long is it between now and when I’m going to spend the money. And if you take that as your base measure, you’ll move steadily to long-term investing, then long-term investing is all about equities, and index funds are an easy way to implement an equity-investing program. Really recommend it.
Arnott: What would you say to the argument that, if you’re a long-term investor and you’ve had 100% in stocks, you’ve had terrific results. But if you look at valuations on stocks, they’re still relatively high from a historical perspective. Do you think that’s a legitimate reason to perhaps be a little bit lighter on stocks than you would have otherwise been?
Ellis: Yes, it is. But it’s not a good idea. It is rational, but it’s not a good idea. And that’s because we’ve got enormous amounts of accurate data to study. Over the years, have investors, good smart investors, even the best investors, have they been able to make judgments about market-timing? And the answer is, on average, people make mistakes rather than successful decisions when they try to do market-timing. I’m quite comfortable saying, OK, I’m going to learn from history. I’m going to learn from the experiences that other people have had. And I’m going to learn from my own experiences. Market-timing is dangerous stuff, and it tends not to work. I accept that’s your statement, that the market seemed to be on the high side of valuation. I accept that. But I’m sure that between now and 10 years from now, I’ll be wiser to stay invested over that 10-year time period than to step out of the market and then make another brilliant call as to when is the market fair value. I think we’re going to see relatively low returns over the next several years.
Yes, I do. But on the other hand, I don’t know. What I do know is over the long term, equity investments have always paid off. Sometimes it takes more than five years, sometimes it takes even more than 10 years for that to be true. But I know that to be true. And I’m a very deep believer in taking advantage of the learning that comes from history. Two history lessons: one, equity investing is more rewarding than bond investing. Big lesson and very clear. The second is market-timing is dangerous stuff and most people can’t do it. I’m quite comfortable accepting. Same here. I can’t do it. So I stay invested and I am invested entirely in equities, and I’m staying with it with considerable comfort that that’s better than any other decision I could make. And as I said, I am in my late 80s, but wait a minute. I’m not investing for me. I’m investing for my wife and for our children. And our children going to college age, their view of the future—if they’ve got another 60 or 70 years between now and the end of their life, and that’s their orientation. And I think it’s just fine that they think long term. And I think I should try to manage the investing as though it was going to be theirs eventually. Because when it is, it should be in a good position and that says equity investing.
Benz: Well, Charley, it’s always a privilege to talk to you. Congratulations on Rethinking Investing. Thank you so much for being with us today.
Ellis: It’s been fun, Christine. Thank you very much.
Arnott: Thanks again, Charley. We really enjoyed talking with you.
Benz: Thank you for joining us on The Long View. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow me on social media @Christine_Benz on X. Or at Christine Benz on LinkedIn.
Arnott: And at Amy Arnott on LinkedIn.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week. Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com. Until next time, thanks for joining us.
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