Charley Ellis on How America Actually Got Built (Investing in America Series) | #633
Meb Faber interviews Charlie Ellis, founder of Greenwich Associates and author of 'Great American Investments,' covering Ellis's career highlights including his pioneering work on share buybacks, his famous 'Loser's Game' indexing thesis, and his new book profiling 14 bold public investments that shaped America. The conversation spans topics from long-term investing principles to historical government initiatives like the Louisiana Purchase, Social Security, and the GI Bill.
Summary
The podcast opens with host Meb Faber introducing Charlie Ellis, an 88-year-old investing legend who founded Greenwich Associates in 1972, served on Yale's investment committee, and has written over 20 books. The conversation begins with an unexpected topic: Ellis's earliest book on share repurchases, written shortly after his Harvard Business School graduation. Ellis explains that post-WWII companies had over-leveraged with debt for government contracts and then overcorrected by paying it down too aggressively, leaving them under-leveraged. He argued companies should borrow to repurchase shares, an idea Goldman Sachs helped popularize by sending copies to 1,000 corporations. That concept has since grown into a trillion-dollar-plus annual phenomenon.
The discussion then shifts to Ellis's most famous work, the 'Loser's Game,' and his views on indexing. Ellis argues that the optimal investing strategy for a 25-year-old is to start early, invest in low-cost index funds, avoid taxes by not trading, and avoid active managers who charge fees. He estimates the average investor loses 2% of returns annually through mistakes, fees, and taxes — turning a potential 7% return into near-zero after accounting for inflation, errors, and management costs. His core message: compounding works best when you do nothing to interfere with it.
The bulk of the conversation centers on Ellis's new book, 'Great American Investments,' which was inspired by his wife's COVID isolation mandate. Ellis catalogues 14 major public investments — including the Louisiana Purchase, Alaska, Social Security, the GI Bill, national parks, the internet, NASA, and the National Institutes of Health — arguing each was driven by one or two visionary individuals who navigated democratic processes to produce transformative national outcomes. He highlights Frances Perkins as the architect of Social Security, noting her psychological savvy in wearing conservative clothing to disarm male colleagues and her disciplined weekly check-ins with FDR to keep him committed to the program.
Ellis discusses the financing structures behind these initiatives, noting that the Louisiana Purchase was essentially a long-term margin loan with no upfront capital, and that Alaska was sold cheaply by a motivated Russian czar worried about overextension after the Crimean War. He emphasizes that favorable deal structures — not just visionary ideas — were critical to these investments succeeding.
On the question of America's future capacity for bold public investments, Ellis points to AI as the most likely next transformative force, though he warns it may eliminate jobs faster than expected. He also highlights America's unique culture of volunteerism and philanthropy — tracing it back to Tocqueville — as a durable foundation for civic progress. He cites Yale's need-blind admissions (40% of students on full scholarships) as an example of forward-looking American institutional investment in human capital.
The conversation closes with Ellis's most memorable personal investment: Berkshire Hathaway. After a disappointing business lunch with Sandy Gottesman in the early 1970s, Ellis asked Gottesman for his favorite long-term investment. Gottesman said 'Berkshire' and declared he planned to hold it 'forever.' Ellis subsequently convinced his Greenwich Associates partners to put their firm's emergency reserve fund entirely into Berkshire at roughly $700/share. That investment has since returned nearly 100x over 50 years.
Key Insights
- Ellis argues that the average investor loses approximately 2% of annual returns through a combination of behavioral mistakes, active management fees, and unnecessary taxes — turning a nominal 7% return into near-zero real returns after inflation.
- Ellis claims share buybacks were a genuinely novel and controversial idea when he wrote about them in the early 1970s, and that Goldman Sachs distributing his book to 1,000 corporations was the catalyst for mainstream adoption of the practice.
- Ellis contends that Frances Perkins deliberately wore dark, conservative clothing with white collars to subliminally remind male colleagues of their mothers and grandmothers, as a strategic tactic to gain influence in a male-dominated political environment.
- Ellis argues that Social Security's design as a self-funding program — rather than relying on general revenue — was Roosevelt's deliberate safeguard against future political reversal, a structural decision he credits as essential to the program's longevity.
- Ellis claims the Louisiana Purchase was essentially a zero-money-down real estate deal, with credit extended over a dozen years, making it one of the most structurally favorable asset purchases in history.
- Ellis argues that the Russian czar sold Alaska cheaply not because of its lack of value, but because of strategic overextension fears after the Crimean War — illustrating that motivated sellers, not just motivated buyers, drive transformative deals.
- Ellis contends that the internet cost less than one million dollars in initial government investment, making it arguably the highest-return public investment in American history on a cost-to-impact basis.
- Ellis recounts that Sandy Gottesman told him in the early 1970s he planned to hold Berkshire Hathaway 'forever,' a conviction Ellis adopted by putting his firm's entire emergency reserve fund into the stock at approximately $700/share, yielding nearly 100x returns over 50 years.
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