Charles D. Ellis - The Elements of Investing: Easy Lessons for Every Investor

thAnniversary Edition

Burton G. Malkiel

Charles D. Ellis

Preface to Anniversary Edition by Gus Sauter
Foreword to Original Edition by David Swensen
10th Anniversary Foreword by Tim Buckley

Cover design: John Wiley & Sons, Inc.

Copyright 2021 by Burton G. Malkiel and Charles D. Ellis. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

First Edition published by John Wiley & Sons, Inc. in 2010.

Published simultaneously in Canada.

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ISBN 9781119773733 (cloth); ISBN 9781119773788 (epub);
ISBN 9781119773801 (epdf)

To our delightful grandchildren,
Porter, Mackie, George, Jade, Morgan,
Charles, and Rays

At her death in 1999, at the age of 91, Oseola McCarty bequeathed $150,000 to The University of Southern Mississippi. For her generosity, she received an honorary degree from the university and the Presidential Citizens Medal, the secondhighest civilian award in the United States. Her gift was all the more extraordinary because she earned her living washing clothes.

At a very young age, Ms. McCarty was taught by her mother to be a great saver. She made tradeoffs, spending what she needed to live on, but forgoing any luxuries. She had a used TV, but only watched shows that she could pick up over the airwaves. She did not own a car, electing to walk everywhere. She lived in a house that she had inherited from her uncle. Over the course of her lifetime, she amassed a remarkable nest egg, estimated to be about $250,000.

Ms. McCarty was the very model of a disciplined saver. Her example shows that a little bit of will powerand yes, thriftcan add up to big things. This is Lesson Number 1 in any sound financial plan, and it is the first lesson in this wonderful book by Burton G. Malkiel and Charles D. Ellis.

Over the past several decades, Malkiel's A Random Walk Down Wall Street and Ellis's Winning the Loser's Game have helped millions of people to understand the fundamentals of investing and to reach their financial goals. In The Elements of Investing, Malkiel and Ellis distill their wisdom and experience into a sensible plan for people to save and invest.

Some money managers warn that successful investing can be carried out by only the most sophisticated and talented professionals. And, of course, these managers claim to be members of that small club. Malkiel and Ellis argue that successful investing should not be the province of a select few. Football games are not always won by the best quarterback; they are won in the trenches. Investors have to win the war of blocking and tackling.

The Elements of Investing provides a roadmap that can multiply your savings to reach your financial target. It starts with understanding some basic questions, like: When will you need this money? How well can you tolerate investment risk? The answers to those questions can help you build an appropriate asset allocation between stocks, bonds, and cash.

The approach should be balanced and the investments should be broadly diversified. Most importantly, the authors stress that the investments must be low cost. One certainty about investing is that, for a given return, the more you spend to earn it, the less of it you will keep. The authors conclude that the best way to implement your plan is to invest in lowcost index funds.

Like blocking and tackling, this approach is certainly not sexy. But, I daresay that most investors would be better off if they followed this strategy. Indeed, it's the kind of approach that we espoused at Vanguard and it has served many clients very well over the years.

Pundits bombard us daily with claims that the old rules no longer apply. They say that people should abandon buyandhold investing and become more opportunistic. Malkiel and Ellis take umbrage with these claims. To be sure, the pundits have been saying this for many decades. While it may seem intuitive that a smart professional should be able to identify the highs and lows of the market, the majority of such professionals have not been able to achieve the longterm returns of the disciplined, lowcost approach that the authors of this book espouse. Do we believe that results will be different in the future? The authors reaffirm the views they expressed in their earlier editions and they provide supporting evidence. Diversification, rebalancing, dollarcost averaging, and lowcost indexing remain the best path to achieve investment success.

The Elements of Investing is a mustread for all investorsthose new to investing and those who have been at it for a while. It's for people of all ages. It should be required reading in high school because the power of compounding is particularly valuable when investors start at a young age. But veteran investors will also benefit from reading this book because it debunks misconceptions and identifies behavioral biases that stand in the way of successful investing. And, just to make sure you do not fall prey to the siren's song of a better way, you should reread this book every several years.