Wednesday, 3 February 2010

Book Review: Winning the Loser's Game by Charles D. Ellis

Call this book A Random Talk About Wall Street. That is both a compliment and a criticism.

It is a compliment because comparing this book to Burton Malkiel's famous A Random Walk Down Wall Street puts it in a special category. Indeed much of the message is the same in the two books - valuable and sage advice on how to survive and prosper as an individual investor in a financial world filled with many predators and some good guys. Ellis pushes many familiar themes: diversify, buy index funds, trade seldom, take a portfolio view, re-balance to maintain asset allocation, adopt a long-term perspective and ignore short-term market fluctuations, consider inflation and real return bonds, market timing futility, avoid excessive mutual fund fees, take account of how various risks work.

The "Random" comparison is also a criticism in that I found the book meanders quite a bit. A chapter topic is begun, and part way through, the text diverges onto a peripheral topic. Ellis' method of exposition feels like a fireside chat from wise old uncle Charley as one idea spurs another. Maybe some readers like that style but I found myself muttering "stick to the topic, will you?" The epitome of this is Chapter 20 Endgame, at once the best chapter in the book and the worst. Endgame talks about leaving the world a better place after you are done, through using your money wisely so that it is a positive force and not a negative force, as it can end up being. There is much text that I found to be inspiring e.g. "Investors who have enjoyed substantial financial success should give careful consideration - no matter what their hopes or intentions - to whether the amount of wealth they can transfer to their children might do real harm by distorting their offspring's values and priorities or by taking away their descendants' joy of making their own way in life." Every parent must think of their money actions with kids from a very early age even if they are not rich e.g. giving a child an allowance to spend or save and considering how to guide the child into using it wisely. Ellis quotes another author who suggests people should give younger family members as much responsibility as they can manage as soon as possible. So true, I experienced that myself and wish I had done it more with my own kids. Suddenly Ellis switches gears. On the next page, there begins a series of numbered paragraphs on IRS limits for IRA accounts, tax-free gift limits, compounding rates, personal residence tax exemptions, trust concepts and the like. After four pages of too-general-to-be-useful such info on tax nitty-gritty, he goes back to the original theme and philosophical level of discussion. He could simply have said at the end of the chapter, "once you have decided what you want do, go talk to a good accountant to make it happen."

The informal presentation does have its benefits - short, easily read and digestible chapters. There are lots of good quotes and anecdotes to illustrate his points. I got lots of ideas for blog posts! e.g. on why this statement is wise in the sense he means it, and silly in another sense - "Never risk more than you know you can afford to lose."

Overall, this book does deliver on its sub-title promise to provide "timeless strategies for successful investing". It is definitely worth reading.

My rating: 4 out of 5 stars

Thank you to publisher McGraw Hill for providing me with a review copy.

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