The Quest for Alpha: The Holy Grail of Investing

Overview

King Arthur and his court pursued the Holy Grail, the mythical cup or dish used by Jesus at the Last Supper.The financial equivalent of the pursuit of the Holy Grail is the quest for the money managers who will deliver alpha—returns above the appropriate risk-adjusted benchmark. The quest for alpha is based on the theory that the markets are inefficient, and smart people working diligently can discover pricing errors the market makes. But there is a competing theory based on about sixty years of academic ...

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The Quest for Alpha: The Holy Grail of Investing

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Overview

King Arthur and his court pursued the Holy Grail, the mythical cup or dish used by Jesus at the Last Supper.The financial equivalent of the pursuit of the Holy Grail is the quest for the money managers who will deliver alpha—returns above the appropriate risk-adjusted benchmark. The quest for alpha is based on the theory that the markets are inefficient, and smart people working diligently can discover pricing errors the market makes. But there is a competing theory based on about sixty years of academic research. Its premise is that markets are highly efficient—the market price of a security is the best estimate of the right price. If markets are highly efficient, efforts to outperform are unlikely to prove productive after the expenses of the efforts. So which theory is correct?

In The Quest for Alpha, Larry Swedroe presents research, data, and advice from some legendary market gurus to show that it is extremely difficult to outperform the market. Examining the evidence from academic studies on mutual funds, pension plans, hedge funds, private equity/venture capital, individual investors, and behavioral finance, he demonstrates that the markets are indeed highly efficient. Swedroe then explains why investors should instead focus on asset allocation, fund construction, costs, tax efficiency, and the building of a globally diversified portfolio that minimizes, if not eliminates, the taking of idiosyncratic, uncompensated risks.

And to those who ask, "But how do you explain Warren Buffett?" Swedroe's answer is simple. "I tell them if they see Warren Buffett when they look in the mirror, go ahead and seek the holy grail of alpha," he says. "If they don't, give up the quest and play the winner's game."

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What People Are Saying

Nathan Hale
“As I noted recently, success in investing is somewhat counterintuitive, and requires most investors to set aside their pre-conceived notions of how to build a portfolio that will allow them to reach their goals. The task is made all the harder because the vast majority of the participants in the financial services industry spend hundreds of millions of dollars annually reinforcing the myth of active management. Fortunately for investors, experts like Larry Swedroe are hard at work pointing out the fallacies of those myths, while also detailing the undeniable logic and mathematics that underpin a passive approach. The Quest for Alpha is a wonderful addition to that effort, and investors will be well-rewarded by reading it and acting upon its wisdom.”
— Nathan Hale, moneywatch.com, March 2011
From the Publisher
“As I noted recently, success in investing is somewhat counterintuitive, and requires most investors to set aside their pre-conceived notions of how to build a portfolio that will allow them to reach their goals. The task is made all the harder because the vast majority of the participants in the financial services industry spend hundreds of millions of dollars annually reinforcing the myth of active management. Fortunately for investors, experts like Larry Swedroe are hard at work pointing out the fallacies of those myths, while also detailing the undeniable logic and mathematics that underpin a passive approach. The Quest for Alpha is a wonderful addition to that effort, and investors will be well-rewarded by reading it and acting upon its wisdom.”
— Nathan Hale, moneywatch.com, March 2011
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Product Details

  • ISBN-13: 9780470926543
  • Publisher: Wiley
  • Publication date: 2/8/2011
  • Series: Bloomberg Series , #130
  • Edition number: 1
  • Pages: 208
  • Sales rank: 1,351,281
  • Product dimensions: 5.60 (w) x 8.60 (h) x 1.00 (d)

Meet the Author

LARRY E. SWEDROE is a principal and the Director of Research for the Buckingham Family of Financial Services, which includes Buckingham Asset Management and BAM Advisor Services. He has also held executive-level positions at Prudential Home Mortgage, Citicorp, and CBS. Swedroe frequently speaks at financial conferences throughout the year and writes the blog "Wise Investing" at CBS MoneyWatch.com.

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Table of Contents

Acknowledgments.

Introduction.

The Holy Grail.

The Quest Begins.

Chapter 1 Mutual Funds: The Evidence.

When You Wish Upon a Morningstar.

Focus Funds.

Active Management of Bond Funds.

Skill Versus Luck.

Advice from Professional Investors and Academics.

Admissions from Industry Practitioners and the Financial Media.

Chapter 2 Pension Plans: The Evidence.

Counterproductive Activity.

The Value of Consultants.

The Performance of Funds Offered by 401(k) Plans.

Fund Selection Skills.

Please Don't Do Something, Stand Still.

Advice from Professional Investors.

Admissions from an Industry Practitioner.

Chapter 3 Hedge Funds: The Evidence.

The Problems With Hedge Funds.

Advice From Professional Investors and Academics.

Chapter 4 Private Equity/Venture Capital: The Evidence.

Characteristics of Private Equity Returns.

Bias in the Data.

Advice from a Professional Investor.

Chapter 5 Individual Investors: The Evidence.

Investment Returns Versus Investor Returns.

Advice from Professional Investors and Academics.

Admissions from Industry Practitioners and the Financial Media.

Chapter 6 Behavioral Finance: The Evidence.

There Is Smoke, But No Fire.

The Tyranny of the Efficient Markets.

Further Evidence.

The Failed Quest.

The Value of Behavioral Finance.

Even Smart People Make Mistakes.

Admissions from Industry Practitioners.

Summary.

Chapter 7 Why Persistent Outperformance is Hard to Find.

The Quest for Alpha Is a Game Played on a Different Field.

Successful Active Management Sows the Seeds of Its Own Destruction.

Closet Indexing.

Concentration and the Role of Trading Costs.

The Role of Trading Costs.

Drifting Out of Small Caps.

Encore Performances.

Who Gets the Money to Manage?

The Value of Economic and Market Forecasts.

The Value of “Expert” Judgment.

We All Want to Believe.

The Value of Security Analysis.

Buy, Sell or Hold.

The Hurdles Are Getting Higher.

Advice from Professional Investors and Academics.

Admissions From Industry Practitioners and Academics.

Chapter 8 The Prudent Investor Rule.

The Prudent Investor Rule.

The American Law Institute.

The Uniform Prudent Investor Act.

Chapter 9 Whose Interests Do They Have at Heart?

Advice From Professional Investors.

Admissions From Industry Practitioners and Academics.

A Triumph of Hope Over Experience.

The Arithmetic of Active Management.

The Arithmetic of Active Investing.

The Math Is Always the Same.

The Costs of Active Investing.

The Cost of Cash.

An Expensive Quest.

Summary.

Chapter 10 How to Play the Winner's Game.

Indexing Is More Than the S&P 500 Index.

Does Passive Investing Produce Average Returns?

Enough.

Needs Versus Desires.

Pascal's Wager.

Conclusion.

The Yale Endowment Fund.

The Way to Win Is Not to Play.

The Quest for the Holy Grail.

The Winner's Game.

Appendix A Rules of Prudent Investing.

Appendix B Doing It Yourself.

Notes.

Sources of Data.

Index.

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  • Posted March 12, 2011

    Highly Recommended

    It may seem from the book's title that believing the investment markets are inefficient is an exploitable concept that will reward the smartest stock pickers and their clients with above market returns (alpha). Mr. Swedroe presents convincing evidence that this belief is wrong and does not represent "The Holy Grail of Investing".
    Imagine having many of the most respected and award winning academic financial experts together in a room to offer the average person prudent investing advice. Mr. Swedroe has done this for us presenting their wisdom as well as his in this fine book. His writing is easy to understand and often entertaining. He presents information in a way that we can understand and make use of. Understanding and implementing the principles he explains will improve the average investors odds of achieving their investment goals without undo risk.

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