Winning the Loser’s Game

Securities markets depend on markets for goods and services

Securities markets depend on markets for goods and services

Most of us enjoy movies, and there is a new one freely available on the Internet entitled, “How to Win the Loser’s Game.” If you have or want investments, this video is an excellent way to learn the essentials of investing. Fix some popcorn, open a soft drink and settle in front of your TV or computer. You will hear clear explanations of key ideas along with good interviews of people involved in creating modern investing.

Viewers can watch the film in one showing of 80 minutes, or in ten parts of varying length. The film comes from Britain, and the narrator has a pleasant British accent, adding perhaps a touch of class.


The film emphasizes the mutual fund industry because that’s where most investors put their money. It begins by comparing how much mutual fund managers earn for themselves relative to what they earn for their investors.

Readers should keep in mind the backdrop: people in business work for profit and growth. Over long periods, exerting constant mental and physical energy, they succeed. Hence the aggregate value of business increases, which means the value of its stock increases. For three decades or so, people have been able to buy very low-cost mutual funds of stocks designed to perform just like the entire stock market of the U.S or world. Other mutual fund managers are worth their pay if they can do better than such low-cost, total market funds that embody aggregate business success.

About one percent of fund managers outperform the market, after deducting trading and operating costs, “with any meaningful degree of consistency.” Then, to pour salt on the wound, they pocket the outperformance in fees. The remaining 99 percent of managers failed to deliver consistent outperformance (yet they still pocket large fees).

Therefore, investors should invest in low-cost index funds that mimic the returns to one or more large securities markets. That’s passive investing—investing by proxy in all businesses. In contrast, paying managers to pick stocks or other securities they believe will outperform the average of all businesses is active investing.

Real Investors

Last week I reported that for the U.S., the average diversified U.S. stock fund returned 7.6% in 2014, while the Vanguard Total Stock Market Index Fund returned 12.56%. That 7.6%-group presumably includes the index funds, so if they were stripped out of the average diversified U.S. category, the comparison would be even more dramatic.

The British film tells the story of why that one-year result is typical. Although it will not be repeated every year, there is ample long-term evidence showing similar results occur in most years.

Of course, 7.6% is not zero or negative, and perhaps that, along with an abundant amount of advertising, keeps people away from a better path.

Many investors follow an even more costly path. They hire a financial planner or other adviser to help them create and implement an investment plan. Such planners often charge 1-2% of a portfolio’s value per year, then steer their clients to actively managed mutual funds. For these investors, we can subtract that 1-2% from their stock returns, leaving 5.6 to 6.6% return in 2014.

The investor who owns Vanguard’s Total Stock Market Index Fund earned about twice as much as the average fellow who paid a planner to invest in actively managed mutual funds.

Again, not every year will offer such stark comparisons.

Film’s Components

The film describes how the mutual fund industry hides its huge fees and costs. It covers the reasons actively managed funds do so poorly, as well as the history of research documenting that poor performance. It argues persuasively for diversification. Then it discusses modern refinements that may offer advantages to a classical index fund approach—what might be called “smart beta” or “factor investing.” [I have not yet discussed that topic in this blog.]

Dimensional Fund Advisers (mentioned last week) uses these new approaches.

The film stresses the need for staying the course. Successful investors stick with a good strategy through bad times like 2008, and that takes real courage. Finally, the film mentions the social effects of current practices: huge amounts of wasted money when the world faces growing waves of retirees having few resources.

The film is part of a series of videos by Sensible Investing TV, a British organization aimed at offering people objective investment advice. Viewers will find other films of equal interest and value at their website.

Here are the links:

The full 80-minute version

The ten-part segmented version

The parent site for Sensible Investing