Charles Ellis | Above the Market

Larry Walters had always wanted to fly. When he was old enough, he joined the Air Force, but his poor eyesight wouldn’t allow him to become a pilot. After he was discharged from the military, he would often sit in his backyard watching jets fly overhead, dreaming about flying and scheming about how to get into the sky. On July 2, 1982, the San Pedro, California trucker finally set out to accomplish his dream. But things didn’t turn out exactly as he planned.

Larry conceived his project while sitting outside in his “extremely comfortable” Sears lawn chair. He purchased weather balloons from an Army-Navy surplus store, tied them to his tethered Sears chair and filled the four-foot diameter balloons with helium. Then, after packing sandwiches, Miller Lite, a CB radio, a camera and a pellet gun, he strapped himself into his lawn chair (see above). His plan, such as it was, called for his floating lazily above the rooftops at about 30 feet for a while and then using the pellet gun to explode the balloons one-by-one so he could float to the ground.

But when his friends cut the cords that tethered the lawn chair to his Jeep, Walters and his lawn chair didn’t rise lazily. Larry shot up to a height of over 15,000 feet, yanked by the lift of 45 helium balloons holding 33 cubic feet of helium each. He did not dare shoot any balloons, fearing that he might unbalance the load and cause a fall. So he slowly drifted along, cold and frightened, with his beer and sandwiches, for more than 14 hours. He eventually crossed the primary approach corridor of LAX. A flustered TWA pilot spotted Larry and radioed the tower that he was passing a guy in a lawn chair at 16,000 feet.

Eventually Larry conjured up the nerve to shoot several balloons before accidentally dropping his pellet gun overboard. The shooting did the trick and Larry descended toward Long Beach, until the dangling tethers got caught in a power line, causing an electrical blackout in the neighborhood below. Fortunately, Walters was able to climb to the ground safely from there.

The Long Beach Police Department and federal authorities were waiting. Regional safety inspector Neal Savoy said, “We know he broke some part of the Federal Aviation Act, and as soon as we decide which part it is, some type of charge will be filed. If he had a pilot’s license, we’d suspend that. But he doesn’t.” As he was led away in handcuffs, a reporter asked Larry why he had undertaken his mission. The answer was simple and poignant. “A man can’t just sit around.” Continue reading →

Charles D, Ellis is a giant in our industry. He is also a really smart guy — retired academic, founder of Greenwich Associates, former Investment Committee Chair of the Yale Endowment, and the author of fifteen books, including two of particular import. These two books are Winning the Loser’s Game: Timeless Strategies for Successful Investing and The Elements of Investing (with Princeton’s Burton G. Malkiel). I met Charley today after he spoke here at the CFA Institute Conference. That’s us above (the giant is on the left). He was delightful.

Ellis sat for an interview with Consuelo Mack recently (it may be seen here). As most of my audience will know, Ellis is a proponent of index investing for individuals. Over the course of the interview, Ellis makes a number of interesting and provocative points, consistent with his books.

For individuals, everything begins with saving, and the earlier we start, the better (because “catching up is hard and keeps getting harder, the longer you wait”).
A few great investors (like Warren Buffett and David Swensen) can beat the market, but most don’t, which is why indexing is smart policy.
The competition among the hoards of industrious and talented investors to outperform is vigorous, effectively cancelling each other out.
A few investment firms have clients’ interests as central (such as the Capital Group, Wellington, T, Rowe Price, American Funds and Vanguard, but most are simply “commercial” and do not.
Investors should diversify as broadly and deeply as possible.
Commodities offer no economic productivity, making investment in them entirely speculative and to be avoided generally.
A key to investing is simply to avoid mistakes, like panic selling and greedy buying (but doing so isn’t simple).
Investors need accountability to someone who knows and cares about them.
Individual investors need to “stabilize” their portfolios as they get older, usually by owning more high quality bonds.

The interview is well worth your careful attention. In essence, Charley is making the case for careful asset allocation using low-cost index funds with regular re-balancing and adjustments as needed to keep the portfolio in line with one’s risk tolerance. This carefully articulated viewpoint leads to my statement of what I call “the Charley Ellis Challenge” — to the extent that you do not agree with or follow his advice, why don’t you and upon what evidence do you rely for not doing so?

Discuss.