ETF Edge - Investing Legend Charles Ellis; Inflation, Active vs. Passive Investing

Episode Date: May 17, 2021

CNBC'S Bob Pisani spoke with Charley Ellis, author of best-selling books like Winning the Loser’s Game and The Elements of Investing – along with Dave Nadig, Director of Research at ETF Trends. Charley Ellis discusses active versus passive investing, why he’s not so hot on bonds, the impact of rising inflation and more. In the ‘markets 102’ portion of the podcast, Bob continues the conversation with Charley Ellis. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, Supporting the Innovators Changing the World, Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you are in the right place. Every week, we're bringing new interviews, market analysis, breaking down what it all means for investors. I'm your host, Bob Pisani. Today, we have a special treat. We're joined by Investing Guru and legend. Charlie Ellis to discuss active versus passive investing. why he's not so hot on bonds, the impact of rising inflation, and more. Here's my conversation with Charles Ellis, author of bestselling books, particularly winning The Losers Game and the Elements of Investing,

along with Dave Gnick, Director of Research at ETF Trends. Charlie, it's very exciting to have you on. I have known you for so many years. I've known your book for so many years, and yet we've never had you on CNBC before, to my knowledge. I found this in my library, Charlie. This was the 1998 edition of winning the losers game, which I got when I came down here in 1997 or 98 or 99, I got it. But it's the 1998 edition, and then the eighth edition is just out.

Congratulations. It's a real investment classic. It's had a lot of influence on me personally. For viewers that are not familiar with your book, Charlie, summarize the findings of the new edition for us briefly. Your key points are that the evidence for investing in indexing in particular continues to get stronger and stronger. And can you summarize that evidence for us now? Sure. You can look at it two ways.

One is top down, the other's bottom up. Top down, you look and see over a reasonably long time period, 15 years, 20 years, how many active managers beat the market index that they chose for themselves and have free time to organize. The answer is somewhere between 10 and 15 percent bond, only 10 and 15 percent. The ones that fall short fall short by a great deal more than the ones who happen to win get ahead by. Well, the odds are stacked against you very badly. The second thing you do is take a look at the data and work up from the specific facts. All kinds of changes have taken place in the investment management world.

Now information is available to virtually every participant at exactly the same time in complete disclosure. So that's because of Bloomberg terminals. It's also because the SEC has made it a law for now a dozen years, that if any investor gets any useful information for making an investment decision, that listed company is responsible for being sure they've done all they can to get that same information to everybody else. When you make changes like that, it's no surprise that it's very hard for people to overcome cost of operations, the fees, and then, of course, for every individual investor, the taxes

that are added on. Indexing doesn't have those kinds of taxes because it doesn't have that kind of turnover, and therefore they get competitive advantage. ETS and index. Yeah. Dave, any argument with that? I mean, the data, of course, is overwhelming, as Charlie said, Morningstar does this. You know, S&P does it twice a year, and they've been doing it for 20 years.

I don't know if we can dispute any of this at all. It seems pretty clear to me at this point, but is there some finer point we need to put on this? Yeah, I mean, just, you know, having been a student of, of, Mr. Ellis' book for decades at this point, you know, I go back to those sort of sources of active management, right? And certainly when we think about stock selection and market timing, obviously, I completely agree the data is the data. Every once in a while, you'll end up with a rare pocket of outperformance. So, for instance, of the last five years, five higher high-yield bond managers have been able to do slightly better than coin flip.

but it's hardly, you know, some sort of raving endorsement for the active managers in that space. But the third source of active management is that asset selection. And I think that's the one where a lot of investors are really hung up right now, particularly because a lot of the old saws, even amongst passive investors, have resolved around things like what is your equity to bond next, what is your home bias versus your international and emerging market's exposure. And I think a lot of investors don't think of those as active management decisions, but boy, they really can be, even if you're only implementing them with low-cost passive ETS. Yeah. What about that? What about that, Charlie? Go ahead. Put your two cents in here on this.

It's important for every single person. Active examination of who you are, what your problems are, of what your opportunities are, what your resources are, how long you've got to be invested. figure out what the problem is, and then work to figure out the solution. That is active, and it really pays if it's done carefully and well. And if you can't do it yourself, get an investment advisor who will take you through the process. That's active at its best. Yeah, but Dave brings up an interesting point that a component of active investing these days is to decide your asset mix. Now, you have been a proponent of broad diversification in index funds. And Dave's trying to, I think, make a point that a lot of investors today have choices, particularly even with ETFs these days, so you can overweight technology stocks.

Recently, there's been a big craze for what we call thematic tech ETFs, which is investing in cybersecurity or investing in climate change or investing in anything that's perceived to be a growth-oriented mode. Is there any evidence? to doing any kind of anything other than broad index investing outperforms at all? None that I know of. You know, not to get too technical on Fama French models, but there have been studies done over decades looking at factors, including value investing, small cap investing, for example,

or investing even by earnings growth. There has been some evidence that value outperforms over growth, small caps outperform over long periods, although that has not happened in the last decade or so. Are you at all supportive of any of those kinds of factor-type investing? I'm not opposed to the concept, but it requires an extraordinary amount of skill and patience because factors don't come along and announce themselves. You have to be waiting for them, waiting for them, waiting for them, waiting. for them. And by the time other people see, oh, look, such and such a factor is really working,

it's probably over. I'm not an enthusiast factor investing, but I do know people are good at it, and I'm willing to let them play that game. I love talking to the active investment community because they get very defensive about this. I mean, they're always sort of like, what are you implying, Bob? I'm not worth the money. I work very hard. They sort of imply, well, I'll admit, other people don't do very well, but I worked very well, and somehow I'm outperforming, and when you really press them, they seem to get annoyed over the idea of passive investing in general. They seem to think it's, you've heard this word un-American, that it's wrong to just be average, you're supposed to swing for the offenses, and then there's the argument, well,

Bob, active investing must work, because if it didn't, all the active managers would go out of business. What is wrong with that argument? You make a point of that in the book. of addressing that? Well, lots of people would like to see active investing work. When I was a child, my mother read to me the little engine that could. And the little engine struggled, I think I can, I think I can, I think I can, and made it to the top of the mountain. And that was wonderful for child. And then when I was in school, I learned that if you do your homework, you're going to get better grades. And in sports, if you work harder, you'll get in better shape and you'll be able to perform better. Many of our life lessons are if you do more homework and work harder and try

harder, you'll do better. And that's often true. But there are some parts of life where that just isn't the case. And candidly, in today's contemporary world, investing for most of us, active doesn't really help and it does harm. Yeah. And Bob, I think the other piece here is that, I don't think even Charlie would say that there is no active manager who has ever outperformed. That's not the case. It's just that the average active manager consistently underperformed. But, you know, even if we think about something like U.S. large cap growth, well, there's still 10% of active large cap growth managers who have a 20-year market beating track record.

Now, we can argue about whether that 10% is coin flippers or true skill or true insight and an ability to sort of manipulate models effectively. But that's part of why we always have this hope that springs eternal, because we can line up 100 active fund managers, and 10 of them, in fact, have incredible 20-year track records. The problem is finding that person for the next 20 years turns out to be a bit of a mug scheme. Yeah, it's incredible to me.

People ask me, well, why do people still invest in active management? Because, as you point out, Charlie, active management, investment products are sold. They're not really bought. One of my favorite stories in your book, you've been using it for years, and I often tell the story about the fisherman who goes into the bait shop, and he sees all of these very gaudy fishing lores sitting there, multicolored fishing lores, and he goes over to the manager and says, any of these fishing lords actually catch fish? And the manager says, we don't sell the lords to the fish, meaning we don't have to

have the fish convinced that they should bite at it. We only need to convince you. You're the fisherman to buy into it. That's a great story. I always use that story as an indication that people are sold these products because they are sold them by people who are very good at convincing people that they ought to be buying them. And the truth, I would like to be convinced that somebody is really so good that they'll be able

to succeed. So we're guilty in part ourselves. It's just, if you stand back from what people are saying and all the excitement of a particular time period and look at the history over time, you'd say there's no way that this isn't going to work out to be really hard for active investment managers on an operational level. And therefore, it's not a game I want to play. We're talking about real money. And if you're saving for retirement or you're saving for your kids' education or you're saving to buy a house, that's real money. It has importance

for you. You ought to play sensibly with it. Yeah. I want to just focus on the key parts of your book. Dave, I'll get you back in here in a minute. But the elements of long-term investing here, which I picked up 24 years ago when I got your book, but it's worth repeating using index funds over active investing, broad diversification, and pay very close attention to the fees, expenses, taxes, and stay focused on the long-term. And Charlie, the key message here is make less mistakes than the other guy. That's the whole point about, there's an explanation about what the loser's game is, but I don't want to get into it.

But I think the key point here is focused on the long term. And the problem with investors is they get scared very easy. How do you convince people who are 55 years old and there's a suddenly as a 20% correction to stay the course? It's that stay the course thing that's really hard. It's very difficult. It's a real challenge and it takes active engagement with yourself to know who you are and set up a portfolio. that you can live with and accept the ups and downs. But when you look at the portfolio,

don't look at it just as the securities portion because all of us have other things that are going on. At some age, Social Security turns out to be a really important part of your total investment picture. At a young person, the really big part of them, everything that has to do with their finances, is their ability to earn and save money in the future. And if they happen to be very talented

and they happen to have good education, they're going to have a substantial capacity to save. They should recognize that and use that as part of their thinking process. Anybody who owns a home should recognize the value of the home is at least as important as the other things in your total portfolio financially. And if you look at all those other components, they're pretty stable. And when the market goes up and down, if you just keep your eye on the total picture, you're going to be much more able to stay the course and get the long-term results that come out of being a long-term equity investor.

Dave, you want to say something? Yeah, I just love your opinion on this, Charlie. You've talked about many times about how investing really shouldn't be entertainment or that that is actually a problematic thing. Yet it feels like over the last year, boy, investing has been entertainment more than at any time in my lifetime. And some of that may be people trapped at home, maybe with a little bit of extra capital they weren't expecting. Do you think that that entertainment component is changing markets? And does it change your opinions about what to do at all? It may be changing markets, but honestly, it is not in any way changed my opinion. My daughter is a very attractive young woman, and she enjoys going to a casino. And I know, and you know, that she's going to lose money as long as she's in the casino. But she goes for the recreational event. It just happens to enjoy it. So what's wrong with that?

As long as it's in small amounts of money, fine. Everybody pays for recreation and entertainment. So let me just pick up on Dave's point here. One of your long-term points has been that the market is now dominated by professionals by and large. And it's professionals trading with other professionals and you can't beat that, which makes a lot of sense. But just picking up on Dave's point, recently there has been a notable increase in retail investing. We've had estimates that, you know, we used to say the market was not more than 10 or 15% retail anymore. And there was some evidence in January.

it may have gone up to 20, 25%. Does that change your outlook at all? What does it mean when there's a lot more retail investors? Does that mean there's a lot of more dumb money? I dislike that word. I don't use it, but that is a word that is used around for professionals to pick off. What does it mean with the Reddit crowd being involved? It's a game I wouldn't personally want to play,

and I would certainly never recommend it to anybody else. Now, if you did want to play the game, for good of sake, recognize that it's a fast and furious game and the ability to understand the game and then to figure out what's the right strategy to play is really hard. So I personally would recommend anybody with his head screwed on tight, skip it. Let other people play that game. Yeah, Bob, I would just say it does feel sometimes like we have two markets, right? We have the fast-moving, high-energy market that I think retail investors have been playing in. And we have this longer, slower, wealth-generating market that I think I, I try to.

I would agree is the one most investors should be paying attention to. Yeah. Let me ask about reversion to the mean. You go to great lengths to demonstrate reversion to the mean. The markets have demonstrated roughly 9% returns very long term, not inflation adjusted, maybe 7% inflation adjusted. Obviously, we've been doing better than that in the last 10 years. Are we due for a reversion to the mean, number one? And number two, what does it mean when the Federal Reserve is the marginal, you know, provider of liquidity in the market since the 2009 bottom? How does that affect stock prices? I know we talk in the traditional way about stocks are determined by dividends, earnings, and how much they're growing or not, and by the PE ratio, the multiple with a specular component. But Jack Bogle never mentioned, like, liquidity, for example.

So I'm asking an open question, but what does it mean when the FedExor? Fed's pumping all this money for years and years into the economy. How does that affect stock prices? Well, you've got to start first with understanding what's the role of the Fed. The Fed is really focused on the economy and on people who are not at work and at rebuilding the energy and excitement within the economy. And one way of doing that, and the only tool they've got that has real power, is to bring the cost of money down, down, down. And now the cost of money is so low that After you adjust for inflation, bonds don't pay anything. So using money to rebuild the economy is the Fed's principal objective.

They don't really care at all about investors, and they shouldn't. That's not their job. As investors, we take what the Fed's doing and then try to interpret what we would do as a consequence. And when the interest rate, as low as they are, you've got to think very, very carefully. I want to get your thoughts on bonds in a moment, but I just want to pick up on this because the S&P is up 500% almost since the bottom in 2009. When I call stock traders, I say, why is the market up 500%? In addition to the earnings growth and dividend growth, almost everyone would say, well, the Fed is pumping money into the market. And traders have come to believe that a good part of that liquidity, that money has found its way into the stock market.

Now, nobody knows if, you know, the market's up 500%. since the bottom, whether the Fed is 20% of that reason or 40% or I don't think you can quantify that. But everyone I talked to believes the Fed is a factor in that. So I'm just trying to figure out how do you factor it in? How does that factor into the old idea that the stock prices are determined by dividends, earnings growth, and the multiple in the market? It seems like liquidity is a sort of fourth factor here that's ever present. The only thing I can suggest, Bobby, is assume that you were on the governing board of the Fed. How would you vote?

You're responsible for the economy as a whole. You've got large numbers of people that are either underemployed or not employed. And you want a fairly modest level of investment by major corporations. It would be wonderful to have more investment spending. What would you do? I know what I would do is just exactly what the Fed is doing. Would I be paying attention to what that means for investors individually? No, I would not, because it's not my job.

Yeah, but for sure money's gone into the market. So I guess the point that, and traders tell me this all the time, Bob, but to what extent is the Fed now permanently sort of in the market and how do we factor that into stock prices? I'm not trying to keep repeating the question to you, but it's an issue that I get all the time. I want to get your thought on bonds. There's a new chapter on bonds.

You say the traditional concept of investing your age is outdated. The old 60-40 model, stock's bonds, is outdated. Why doesn't it work anymore, and what do investors need to do with their bonds? The real answer is a little bit complicated, but not very. It isn't what is the present price or yield of bonds. It's not entirely the comparison, between bonds for the long term and stocks for the long term. It's all about individuals differ.

Every one of us has different characteristics as investors. Different amount of wealth, different amount of income, different amount of savings capacity, different attitude towards risk. And when you take all of those different things and a different time horizon, when you put all those things together, it makes for a very important way of defining

who you are as an investor. And that's what should be governing your way of investing. So the fact that you were 30 years of age doesn't answer the really important question. What's the capacity of this individual? If it's somebody who's 30 and has a high school education and has a very modest level of savings capacity, that's a person that might very well want to do 30% in bonds. But if you were 30 and you had an MBA and you were on your way towards a really interesting career and you knew that you were going to be able to save substantial amounts of money,

then you wouldn't look at that 30% as being anything like a sensible idea because you're going to be able to save, save, save, save, and that creates an enormous property value. Then you're going to have Social Security, which is much larger than most people recognize. Then you're going to have a home, and that's a stable asset, but it does fit into your total picture. What in the world is the reason for having 30% in bonds? There may be somebody in the world for whom that is the correct answer,

but there are not very many. Certainly aren't everybody. Yeah, I guess, Dave, to me, it's pretty simple. I mean, I agree with Charlie, but it's pretty simple. I mean, record low rates, even slightly higher rates we have now, has meant zero net return in bonds for a long time. I mean, I know there are periods where bonds outperform stocks, but what's the talk in the way?

EGF community? I think it's slightly more complicated than that. I mean, bonds in a portfolio have always behaved differently than an individual bond. It's very easy to explain a single treasury to anybody, but to explain what happens in a portfolio of constantly rebalancing bonds, that's a very different pattern of returns in a portfolio. And that whole portfolio responds very differently when you're at the lower bound, which is where we're at in terms of interest rates.

So I think the reality is both that you're not being paid very much. well for taking on what is at least some risk. And also that it no longer functions the way we used to think about bonds functioning when the sort of base rate was 5% on the 10 year or something. So I think there are multiple things going on there that just make bonds a very difficult asset class to own right now. It doesn't mean that an individual bond isn't, can't still serve a specific purpose for somebody. I know plenty of advisors who are still building individual bond ladders for certain clients with certain needs. But the blanket idea that as an asset class, you can just put money in the ag and it will do a certain thing for you.

I just don't believe it's true right now. Yeah. Charlie, your thoughts on inflation. Obviously, we've had some concern recently about inflation. Some sectors like growth sectors, growth stocks, tech stocks have been hit recently. The relationship between stocks and inflation strikes me as very complicated, but I wonder if you could simplify it in some way. So there's a certain expectation embedded in stock prices right now. on inflation. I don't know what it is, 2% maybe, but if it goes from 2% to 4%, particularly

suddenly, the market does move on that. Is that rational? Should investors expect some kind of higher return if inflation moves suddenly, particularly outside of a certain bound? Sure. But it starts with bonds. If you look at bonds, you should always do an inflation-adjusted return on bonds. And that if bonds are not a attractive, you're going to have trouble having equities be. If bonds are a bad bet because of inflation, the inflation is going to affect equities as well, then it will reduce the value of equity securities, no doubt about it. Yeah. Let me ask you a... Yes. Go ahead. And those of us who think we know exactly what's going to happen to inflation usually find

themselves seriously disappointed often. Let me ask you a... about zero commissions. I find this very interesting. I'm wondering how it might change the calculus that active investing is worth it or not investing because obviously for years, people like you and Bogle have been, Jack pointed out, that when you include net of fees and all expenses,

that's where active management really falls down. But with commissions at zero and fees still high but coming down, Does that start affecting the overall calculus? Is it less obvious than it used to be about being concerned about the cost of fees and commissions? Chases are that it's being upset by the driving forces that make indexing so darn attractive, which are everybody has everything in the way of information at exactly the same time because of the extraordinary distribution of information that's taking place in the markets. And it is astonishing how much information is available all the time to virtually everybody who's playing.

It's a little bit like playing cards with all the cards base up. The world has changed, and most of us are still living with visions or understandings. They were formed years ago, and we ought to be revising. I love Kevin. Wonderful comment. When the facts change, I change my opinion. What do you do about yours? Yeah, Dave, you're a student of this as well here. The fact that ETFs are driving costs down and commissions are zero,

I wonder if that, how much that still affects the whole idea, that net of costs, active investing still isn't worth it. I mean, the calculus changes a little bit at zero commissions. Yeah, I think what it does is, you know, to Charlie's point, right, information is now sort of freely available, moves instantaneously. there really are no core informational edges. What I do think exist are structural edges, and those tend to be very thin, and they tend to be very transitory.

What I mean is, you know, looking at particular skews, say, in the derivatives market, or looking at arbitrage opportunities between venues because of time delay. Like, those things still exist. They exist in infinitely small amounts, and so therefore you have to run enormous volumes through those edges to create any value. But those things exist. That's not what we're talking about when we're talking about people positioning for their retirement account. So I think what we've done is move a lot of the available VIG, if you will, in the market to a fairly rarefied part of the market.

And the core stock and asset selection that most of us have to live with in the world, I would agree with Charlie. I think for most people focusing on low-cost, broad, diversified indexing is going to be the way to go. I'm going to have to leave it there. We've gone a little bit long, but we're with a man who's had a big influence on me, Charlie Ellis, over the years, and it's the first time I've had them on our air. So I wanted to make a special point about it. That is it for this week's ETF Edge. My thanks to Charlie and Dave. Now it's time to round out the conversation with some analysis and perspective to help you better understand the markets and ETS. This is the Markets 102 portion of our podcast. Today we'll be continuing the conversation with Charles Ellis.

Charles, thanks for sticking with us. I just want to get a few other thoughts on investing from you. One of the points you bring out in your book is that, well, almost no active managers succeed in the very long run. There are a few that do have long-term successful records. One was a small group of super quants, you know, the Renaissance capitals of the world, that have done well. And then there are a few small research firms with small numbers of stocks pickers that have done well. I guess the question is, on the super quants, they seem to be able to exploit micro inefficiencies in the market. I think that's quite impressive, but it doesn't seem like the average investor can do that.

Is there anything at all we can learn from the quants who move quickly in and out of the markets, looking for changes in numbers and relationships between numbers? Honestly, I think the answer is no. If you look at their history, you say, gee, miss, if Renaissance came. me at any time along the way and said, would you like to invest with us? Would you say yes or no? I would say no. I really don't because I don't understand what the record provides because they were working in extraordinarily complex mathematical models and it required an expert to understand what they were doing. And I'm no expert in mathematics or quantitative analysis. I'm an art history major. I know all about

people and stuff like that, but I don't know anything about advanced complexities of numbers. These guys are experts at it. 100 different experts, all quant-skilled, working together to find the best things they can find. They've been successful. I love it. How would I like to be a client of theirs? Retroactively or retrospectively, I would love to be. But would I be willing to sign on with them? No. And I was given that opportunity a year and a half ago, and candidly, the record since then proved me to be right. No, I wasn't right. I was just standing in the right place at the right time. Yeah. I do believe on the other hand that if you can find a really gifted portfolio manager, it's got half a dozen superstar adults who really know their industries, and they're going to work

away from where everybody else is working, not in the top 500 companies, not even the top thousand companies, but in smaller, unusual companies we're going to get really close, I do believe they can do better. And I've seen it, and I have no problem at all with that taking place. Why do they do better? Because nobody else is anywhere near, as smart as they are, working in the area in which they're working. So the competition is minimis. And the problem I've got with normal investing in the top 500 stocks particularly is this so damn much competition. And it's terrific. And it's very well informed. And it's got to win, playing, playing, playing, to win all the time. But you get down to smaller companies that nobody's paying any attention, there's a real opportunity. If you could

find that manager, if they were willing to take your account. Yeah, it's a, it's a very tough call. I have been doing, this is my 31st year at CMBC, and I know a lot of good active investing managers. I'm a Jack Bogle disciple, and Jack always used to say to me, we have active investing at Vanguard, but we keep the cost low, and that seems to be the real key. Obviously, even if you can get any kind of active manager who might outperform over a several-year period, the cost generally destroy the outperformance. Jack saw that 40, 50 years ago. And, you know, Vanguard still has active management, but it's relatively low cost. Let me ask you about ESG investing, environmental, social, and governance.

It's exploded in the last year. We get all sorts of interest in it. There's ETFs for it. What's your thoughts on it? I know it makes people feel good for their soul, but there's there any evidence that it's good for their investing, or should they care about this? Folks care for what they care for, and I think it's good for the soul, so I'm fine on that, if that's the reason. I'm also fine with those organizations, and one that I've always been intrigued by, is carefully called Blood and Gore, because Al Gore and David Bloods set up an investment. organization called Generation, and it is now fully booked so they were not take new accounts.

But they have been very clearly working on ESG, and they have evidence that it really does pay off for them. So they're doing good by doing good. Nice kind of a situation. Yeah. It's a very hotly debated in the investing community. You can see the money flowing in I understand why it happens. Who's not in favor of a better environment or better, you know, social system and better governance, improve governance. I vote yes. But it's been tough getting there because it's been very difficult to define exactly what it is.

And it's astonishing how different some of these ESG funds are. They claim to be ESG and yet invest in completely different things. Let me ask you about David Swenson, who wrote. wrote the intro to the seventh edition of your book. He, of course, was the lead investment manager for Yale University for many years. He was an active investor, at least in the beginning, had an astonishing record over time. And yet, he was a man who came out and said the average person shouldn't be an active investing. The average person should be an index funds.

You worked very closely with him for many years. Did you learn anything from him? I asked him because he recently passed away, and I had a tremendous amount of respect for him. But just a few weeks ago, Mr. Swenson passed away. I have to tell you, I learned so much about investing through my time with David Swenson that if you said, would you take a few minutes and tell us about it, you'd be upset that I was taking too long. One of the great things that David taught was start with who the investor is and what the investors' real needs are, capacities, interests, and so on.

Once you understand exactly who you are, figuring out what's the right investment program for you is reasonably straightforward. But if you don't do that, you're almost sure to be wandering in the wilderness and making mistakes. David also was very strong-minded about taking a long-term view. I agree with them, and I think it's wonderful discipline. Careful selection of managers. If you looked at the list of managers, the portfolio that David put together, you would say,

I have to admit to you, Charlie, I don't know most of these organizations. I don't even recognize the names. And I would say back to you, same here. I don't recognize the organizations, and I don't know anything much about them. David Swenson is out there finding investment managers that the rest of us may learn about in the future, may never hear about, but they are very highly skilled, highly specialized, highly focused investment managers doing something that nobody else is doing. That's another lesson really worth keeping in mind. The introduction to the seventh edition of the book that David wrote was very instructive

because he made it very clear. I did pretty well as an active manager, but I had 40 people scouring the world for all sorts of investments, including non-traditional investments, by the way. And the average investor doesn't have that, and it's not worth it for the average investor to try to do that. So I thought that was very insightful. It's not that it's completely impossible to do a little bit better. It's just ridiculously hard in this environment. And I think your key lesson here is understand who you are and what kind of level of volatility you are comfortable with. Could you handle a 20% or 30% downturn and learn to live for a long time?

I'm amazed at people, I'm 65, I'm amazed at people who ask me all the time, should I stay in the market? I said, well, how long are you talking about? They said, well, just this year, should I stay in the market? I said, well, how, Mike, the first question I asked them is, when are you going to die? And they look at me like, that's a ghoulish question. I said, well, if you're my age, 65, I'm planning to live to 90. That means I have 25 years. If the market's down 20% this year, I'm going to be pretty unhappy, but I'm not going to pull out.

I don't know if you will, but there's a question to ask yourself. If you're 65 years old, you're thinking to live to 90, and the market drops 20% this year, are you going to freak out and pull out? It's probably a stupid idea if you're going to live to 90 and stay in it. And that's the way you've explained it, and that over the years is the way I've started to explain it. So you've rubbed off on me just like Jack Bogle and your buddy and my friend, Burton Malkiel, have done, and Jeremy Siegel at the Wharton School. These books had tremendous impact on me, your book, as well as a random walk down Wall Street,

and Stocks for the Long Run by Jeremy Siegel. Those books I read 24 years ago, 23 years ago, and they're still sort of the basis on which I based my overall view of the markets. And you quoted Adam Smith, my favorite quote from the money game. If you don't know who you are, the stock market is an expensive place to find out. The book is full of all sorts of great insight, folks, and I can't tell you, this is one of the great investment classics. There's a half a dozen of them that I think are true classics. winning the losers game is one of them. And Charlie Ellis, it's been a wonder, great fun to have you on today.

I've admired you for many years. And I'm just very happy to finally be able to get you on and get your thoughts. Thanks very much. Thank you, Charlie. Charlie Ellis, investing legend, and of course, the author of winning the Losers game out in an eighth edition tomorrow. Thanks very much for joining us, everybody, as they said, have a healthy, happy and safe. trading with. Invesco QQQ believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at investco.com slash

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