“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” – Ernest Hemingway.
“Recovery in sight, says departing Bank of England governor Mervyn King..” – The Daily Telegraph.
In one of the most powerful and memorable metaphors in finance, Charles Ellis, the founder of Greenwich Associates,cited the work of Simon Ramo in a study of the strategy of one particular sport: ‘Extraordinary tennis for the ordinary tennis player’. Ellis’ essay is titled ‘The loser’s game’, which in his view is what the ‘sport’ of investing had become by the time he wrote it in 1975. Whereas tennis is ‘won’ by professionals, the practice of investing is ‘lost’ by professionals and amateurs alike. Whereas professional sportspeople win their matches, investors tend to lose the equivalent of theirs through unforced errors. Success in investing, in other words, comes not from over-reaching, in straining to make the shot, but simply through the avoidance of easy errors.
Ellis was also making the point that as far back as the 1970s, investment managers were not beating the market; rather, the market was beating them.
This is a mathematical inevitability given the crowded nature of the institutional fund management marketplace and the impact of management fees on end investor returns. Ben W. Heineman, Jr. and Stephen Davis for the Yale School of Management asked in their report of October 2011, ‘Are institutional investors part of
the problem or part of the solution ?’ By their analysis, in 1987, some 12 years after Ellis’ earlier piece, institutional investors accounted for the ownership of 46.6% of the top 1000 listed companies in the US. By 2009 that figure had risen to 73%. That percentageis itself likely understated because it takes no account of the role of hedge funds. Also by 2009 the US institutional landscape contained more than 700,000 pension funds; 8,600 mutual funds (almost all of whom were not mutual funds in the strict sense of the term, but rather for-profit entities); 7,900 insurance companies; 6,800 hedge funds; and more than 2,000 funds of funds (the horror ! the horror !)
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