by Ben Carlson, A Wealth of Common Sense

“The “winner’s game” of rigorous, individualized values discovery and counseling may not be as financially rewarding to investment managers as the performance “product” business based on price discovery, but as a profession, it would be far more fulfilling.” – Charles Ellis


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Charles Ellis, author of the classic book investment book Winning the Loser’s Game, came up with one of my favorite analogies for the investment process.

In the book he compares investing to professional tennis. The best players in the world hit enough solid shots until their opponent finally makes a mistake (the winner’s game). On the other hand, amateur tennis players tend to lose points because they make basic mistakes and unforced errors (the loser’s game). Simply cutting down on unforced errors and reducing mistakes can help you become a better investor.

Ellis has a new research paper out in the Financial Analysts Journal that offers even more great advice for investors and the industry as a whole. He makes an important distinction between price discovery and value discovery (emphasis mine):

Ideally, investment management has always been a “two hands clapping” profession: one hand based on skills of price discovery and the other hand based on values discovery. Price discovery is the skillful process of identifying pricing errors not yet recognized by other investors. Values discovery is the determination of each client’s realistic objectives with respect to various factors, including wealth, income, time horizon, age, obligations and responsibilities, investment knowledge and personal financial history, and designing the appropriate strategy.

The media and most active mutual fund managers focus almost exclusively on price discovery. While this is an interesting exercise, it’s probably not the correct focus for 95% of investors out there that have neither the time nor skill-set to compete in that space. Ellis discussed this in the paper:

Although not as exciting as competing on price discovery, investment counseling based on values discovery is greatly needed by most investors—institutional investment committees as well as individual investors—and surely offers more opportunities for real long-term success to both our profession and our clients.

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