Winning the Loser’s Game (Third Edition), Charles D. Ellis

McGraw-Hill, 1997, 142 pages, US$24.95 hc, ISBN 0-07-022010-7

I have long been fascinated by money, and mot merely for the obvious reasons. In a world where money has been standardized as a universal exchange medium, economics are rivaling in importance with political science and sociology as a way to understand why society behaves the way it does. Where does money come from? Where does it go? Where does it accumulate? Can it be seen as a fluid or maybe even a force? How do you even begin to understand the complexities of money flow?

Then again, as with every good citizen/consumer of our oh-so-wonderful capitalistic societies, understanding how to make money ranks only slightly below how to eat and obey traffic laws. There’s enough ranting about early retirement to make it imperative to learn how to accumulate enough money to -ironically enough- not work for the rest of your life.

Charles D. Ellis’ Winning the Loser’s Game is a splendid investment manual, a reasoned treatise that may make almost too much sense for everyone. It’s a small book, but every single page is worth its weight in greenbacks. You don’t need to be a genius to understand this book, and the advice it provides seems appropriate for everyone. I can’t know whether it’s the ultimate investment theory, but at the moment it’s just perfect for my own level of financial savvy.

Ellis starts by explaining the realities of modern investment. It’s not a domain where a genius can simply outperform everyone: it’s a field where thousands of equally-capable professionals are all second-guessing each other. (The metaphor here is amateur’s sport (where one tends to be scored against through luck or incompetence) versus professional sports (where players will score points, often deliberately exploiting opponent’s mistakes). Over the long run, everyone will do equally well, except for obvious mistakes. In this context, time-investing (buying low, selling high such as in commodities trading) won’t work, and neither will any scheme trying to “beat the market”. The only way is to stay in the game long enough and to avoid obvious mistakes such as panic-selling or impulsive trading.

Winning the Loser’s Game appeals to me because it’s the ultimate antithesis of those doubtful make-money-fast “magic recipes”. It tells you to invest and forget. It explains to you through statistics why stocks aren’t such a bad idea in the long run. It drills in the notion that risk is, well, risk: higher margins to gain, higher chances to lose. It busts a few myths and teaches you the counter-intuitive logic of investing. It’s reasonable, makes as many warnings as recommendations and it written in a limpid style. Let me repeat that: A limpid style. I’ve seldom encountered a most compulsively-readable financial treatise.

Naturally, one could make a case that in preaching faith in the overarching system and promoting long-term stock investments, Winning the Loser’s Game is a self-fulfilling instrument of capitalist thinking. If everyone followed the advice of the book, everyone would be a winner. Well, yeah. Duh.

But Winning the Loser’s Game isn’t the soulless capitalistic textbook you might expect. Ellis spends some time discussing the significant disadvantages of leaving too much money to your children, and heavily promotes the virtues of philanthropy. It also helps that Ellis regards unethical business practices as anathema to good investment; even anti-business activists might have a hard time disagreeing with this book, if they would stoop so low as to read it.

As for me, well, reading Winning the Loser’s Game is like attending a lecture from an advanced economics course. I’m left with nearly as many questions as before, but they’re -I think- entirely more sophisticated questions. I intend to keep the book handy and refer to it once my mortgage is paid and I get into the “Loser’s Game” myself. Hey, I’m still a third of a century away from retirement; I can take the long view he’s espousing.

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