hot performers and dumping laggards. Study after study of mutual fund trading concludes that investors buy high and sell low, subtracting value with their timing decisions. Ellis and Malkiel sensibly advise investors to adopt a coherent long‐term strategy and stick with it.
Security selection decisions further reduce returns. Ellis and Malkiel cite depressing statistics regarding the failure of the majority of mutual fund managers to exceed the returns of low‐cost, passive, market‐matching index strategies. The documented dismal numbers only begin to capture the enormity of the situation. Ellis and Malkiel cite numbers only for funds that survived, a relatively successful subset of the mutual fund universe. The failures, which as a group produced miserable returns, are nowhere to be measured. Many funds disappeared. The Center for Research in Security Prices collects data on all mutual funds, dead or alive. As of December 2008, the Center tracked 39,000 funds, only 26,000 of which are active. The 13,000 failed funds do not show up in the authors' studies of past returns because the failed funds do not have current track records. (They disappeared, after all.) Considering the experience of mutual funds, dead and alive, reinforces Ellis and Malkiel's advice to take the low‐cost, passive approach.
Of course, even in a slim volume, quibbles arise. I view home ownership more as a consumption good and less as an investment asset. I cast a skeptical eye on Ellis and Malkiel's implicit endorsement of stock picking in their confessions regarding personal success in security selection. (Is it surprising that two of the greatest figures in modern finance would figure out how to beat the market? Yes, they can pick stocks—the rest of us cannot.) I more emphatically recommend Vanguard, which, along with TIAA‐CREF, operates on a not‐for‐profit basis and thereby eliminates the money management industry's pervasive conflict between profit motive and fiduciary responsibility. Quibbles aside, The Elements of Investing delivers an important and fundamentally valuable message.
When I was a doctoral student at Yale in the late 1970s, my dissertation advisor, Nobel laureate James Tobin, suggested that I read A Random Walk Down Wall Street to learn about how markets really work. Burt Malkiel's wonderful book provided a critical foundation for my academic work. When I returned to Yale in the mid‐1980s to manage Yale's endowment, I came across Investment Policy, the predecessor to Winning the Loser's Game. Charley Ellis's marvelous volume informed my approach to investment management in countless ways. Now, Charley Ellis and Burt Malkiel have produced a magnificent primer on investing for all of us. Follow their recommendations and prosper!
David F. Swensen
Author of Unconventional Success: A Fundamental Approach to Personal Investment
Chief Investment Officer, Yale University
July 2009
FOREWORD TO THE ANNIVERSARY EDITION
Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty. –Theodore Roosevelt, 1910
A common misperception is that successful investing requires a ton of money, a complicated portfolio, or a detailed understanding of where the markets are headed next. The truth is, sometimes the simplest approach is the toughest to beat. Charley Ellis and Burt Malkiel do a masterful job in Elements of Investing of laying out clear, simple rules that any investor can follow to grow their wealth over time.
Here's the catch: Just because something is simple doesn't mean it's easy. Anyone who's tried to adopt a New Year's resolution to eat healthier or exercise knows what I mean. Day 1 is full of optimism. By Day 7, the initial thrill may have worn off. By Day 30, most of us have reverted back to old habits.
Investing is hard, not because of its complexity but because it requires patience and persistence. Ellis and Malkiel counsel simplicity and discipline, which easily translates to real dollars and cents. Vanguard has studied the best practices outlined in Elements of Investing and quantified the value investors gain when they follow them. In total, an investor can add up to 3% in net annual returns if they build a low‐cost portfolio, rebalance appropriately, maintain tax efficiency, and don't chase returns. A balanced portfolio following this disciplined approach will likely have twice the final value of the typical undisciplined approach over 25 years.
Despite what the headlines or cable pundits might tell you, hot stocks or complicated bets on future market moves are not the way to build your nest egg. There are no shortcuts when it comes to achieving significant financial milestones like buying a house, sending kids to college, or saving for retirement. A strong investment strategy isn't flashy or even fun (unless you're someone like me who gets to see millions of clients succeed by being disciplined). Beware of apps or websites that conflate investing and gambling. Investing is how you build your wealth over time; frequent trading is on par with a trip to the casino—it might be exciting for awhile, but the house wins in the end.
Elements of Investing is a helpful companion for your investing journey, debunking the myth of complexity and reinforcing time‐tested principles any investor can use. Whether you're a do‐it‐yourself investor entering the markets for the first time or a seasoned professional with decades of experience, having the discipline to follow the authors' wise advice will serve you well and help you reach your financial goals.
Tim Buckley
Vanguard Chairman & CEO
August 2020
INTRODUCTION
In 112 years of study and experience,* here are the Elements of Investing we wish we'd always known. Experience may well be the best teacher, but the tuition is very high. Our objective is to provide individual investors—including our delightful grandchildren—the basic principles for a lifetime of financial success in saving and investing, all in 159 pages of straight talk that can be read in just two hours. There are many good books about investing. (Indeed, we've even written a few ourselves.) But most investing books run to 400 pages or more and go into complex details that tend to overwhelm normal people.
If you're like most people, you have neither the patience nor the interest to plow through that much detail. You want to get the main things right. Still, having unbiased information about financial decision making and avoiding costly investing errors is critically important.
That's why we present the most important lessons in this easy‐to‐read, jargon‐free little book. If you happen to be familiar with William Strunk Jr. and E. B. White's classic book The Elements of Style, you will recognize one of the original sources of inspiration for this book—and why we are so brief. If you are unfamiliar with Strunk and White, don't worry. All you need to know is that they whittled down the art of powerful writing to a few basic rules of usage and composition. In less than 92 pages, they shared everything about writing that truly mattered; brevity and precision became instant virtues. Strunk and White's wafer‐thin classic has chugged along for decades. No doubt it will outlive us all.
We now dare state our goal on the equally important topic of investing. How surprising to us that everything of importance on such a heady topic can be reduced to rules you can count on one hand. Yes, investing can be that simple if your brain remains unclouded with taxing complexities. These rules will truly make a difference.
Our promise: Reading this book will be the best time you could spend to put yourself on the right path to long‐term financial security. Then, over your lifetime, you can pick this book up again to scan its lessons and remind yourself what is elemental if you want to turn a loser's game into one you can really win.
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