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Fun While It Lasted

Charlie Ellis has a short message for anybody hoping for a repeat of the roaring bull market we've enjoyed for the past 25 years: don't get your hopes up.

"For those of you who think you'll ever see it again in your lifetime, forget it," Ellis said. "It will never happen."

Ellis, managing partner of the research and consulting firm Greenwich Associates and author of Winning the Loser's Game, attributed the market's remarkable climb in the past quarter century largely to the dramatic decline in interest rates recorded over that period of time. It was a catalyst, he said, that can't be duplicated today because rates are now near their historical lows.

Other factors that fed the bull market, Ellis noted, included having a nation at peace, favored with open markets, a democratic form of government, a strong educational system and improving health care. Thus, as interest rates began to subside following the high inflation of the 1970s, the economic misery that had settled over the country gave way to optimism and allowed the bull market to take off.

Speaking at the 2000 National Forum of the Stable Value Investment Association in Washington, D.C., Ellis went on to say that although the tremendous bull run we've enjoyed may not be repeated any time soon, it's not necessarily a bad time to be an investor.

"It's my simple theory that long-term investors setting a policy and sticking with it will be winners in their own terms," Ellis said. The key to their success, he said, will be to focus principally on getting the right asset allocation mix, and avoiding the temptation to get too fancy, by, say, trying to time the market.

"Most people put money at greatest market risk at market highs," Ellis observed. "And vice versa; they tend to sell at market lows."

Ellis cited golfer Tommy Armour as an unlikely investment guru. Armour, Ellis said, wrote a book entitled How to Play Your Best Golf All the Time in which he advised golfers to always hit the shot that makes the next shot easy. "That's good advice for a lot of things in life, and its good advice for investing," Ellis said. "Playing to get it right is not good advice in investing. Playing not to get it wrong is."

Despite his tempered optimism for individual investors, Ellis painted a challenging future for institutional investors, who, he noted, have not fared well in the past decade. Over the past 10 years, he noted, 89% of mutual funds lagged the S&P 500 stock index.

The reason, he said, can be found in the makeup of the investor community. Years ago, 90% of the market's trading was accounted for by individual investors who were not experts on the market, had limited knowledge of the companies and industries in which they were investing, and often made buy and sell decisions based on factors that had nothing to do with the intrinsic value of the market, such as the need to buy a house. In that environment, he said, it wasn't hard for professional investors to have an edge.

Today, Ellis said, institutions account for the vast majority of stock market trading activity, buying and selling on hard information and extraordinarily rational investment strategies. That leaves these professionals to trade principally against each other, rather than less knowledgeable individual investors. Hence, the big edge that the pros once enjoyed is largely gone.

Ellis did see a bright future for the financial services industry, though and, in particular, those institutions, including stable value providers, who participate in the defined- contribution plan marketplace.

"In one country after another, defined contribution investing is on the agenda," Ellis said. "Affluence is rising around the world, and more and more people want to make their own investment decisions. There is a wonderful opportunity for your industry to be very useful."

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