While I enjoy writing and providing educational information to investors, sometimes you have to defer to others more eloquent than yourself. I openly admit to being a fan of Charles Ellis. As I have mentioned in this blog, I believe his classic, “Wining the Loser’s Game” is the best investment book ever written (with Benjamin Graham’s “The Intelligent Investor” being a close second). Every investors would be doing themselves a tremendous favor by taking the time to read Ellis’ “Winning.”
In support of my argument, I offer the following excerpts from “Winning,” along with a quotes from a two articles he wrote.
“The real marginal cost of active management is the incremental fee that active managers charge versus the incremental returns they deliver.”
“[R]ational investors should consider the true cost of fees charged by active managers not as a percentage of total returns but as the incremental fee as a percentage of risk-adjusted incremental returns above the market index.”
[The incremental fees for an actively managed mutual funds relative to its incremental returns should always be compared to the fees for a comparable index fund relative to its returns. When y ou do this, you’ll quickly see that the incremental fees for active management are really, really high – on average, over 100% of incremental returns!”
“That right! All the value added – plus some – goes to the manager, and there’s nothing left over for the investors who put up all the money and took all the risk.”
The Active Management Value Ratio 2.0™ provides a quick and simply method of proving these points to skeptical investors who are willing to take the time to protect their financial security.