"The Quest for Alpha" -- A Gem by Larry Swedroe

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Taylor Larimore
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"The Quest for Alpha" -- A Gem by Larry Swedroe

Post by Taylor Larimore » Sun Feb 06, 2011 2:31 pm

Hi Bogleheads:

Author Larry Swedroe presents a convincing case, supported by dozens of academic studies, that the quest for alpha (returns above the appropriate risk-adjusted benchmark) is a losing strategy. He then goes on to explain why investors should focus on portfolio construction, costs and tax-efficiency. These are valuable excerpts I call "Investment Gems":

"The quest for the Holy Grail of alpha is the triumph of hope, hype, and marketing over wisdom and experience."

"Unless you have an MBA in finance, it is likely that you have never taken even a single course in capital markets theory."

"If 10,000 individuals participate in a coin-tossing contest, after 10 repetitions we would expect to have 10 who called each toss correctly and earned guru status." (edited for brevity)

"A 2002 study by Mark Carhart and three colleagues analyzed the performance of 2,071 equity funds for the period 1962-1995. The average actively managed fund underperformed its appropriate passive benchmark on a pretax basis by about 1.8% per annum."

"Turnover reduces pretax returns by almost 1% of the value of the trade."

"Using Morningstar's ratings system is like driving forward while looking through the rearview mirror."

"A 1994 article in Fortune magazine reported that only 16% of 800 fixed income funds beat their relevant benchmark over the 10-year period covered."

"The belief that active managers are likely to protect you from bear markets is just another myth perpetuated by Wall Street."

"The past is not prologue when it comes to mutual fund returns."

"The 44 Wall Street Fund ranked as the top-performing diversified U.S. stock fund of the 70s. It ranked as the single worst-performing fund in the 1980s"

"Saint Jack as he (Jack Bogle) is known because of his tireless crusading efforts on behalf of individual investors, is one of the most respected people in the world of finance."

"If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you." (Ralph Wanger quote)

"Expense ratios are the best predictors of performance, way better than historical returns." (Morningstar study)

"Please don't do something, stand there."

"For the period from January 1993 to October 1998, after subtracting fees, the average annualized return of hedge funds was 13.4%, trailing the 19.9% return of the S&P 500 by -6.5%."

"Unlike mutual fund investors, hedge fund investors typically must accept long lock-up periods."

"Less than 25% of the hedge funds in existence in 1996 were still alive in 2004."

"Long-Term Capital Management (a giant hedge fund) which managed to lose 92% of its capital, did not report that loss to public databases."

"Private equity strategies--forgo the benefits of liquidity, transparency, broad diversification, and access to daily pricing that mutual fund investors enjoy."

"Endowments differ from individual investors because of their very long investment horizons, allowing them to take liquidity risk that would be inappropriate for individual investors."

"Investment clubs have something in common with individual investors--trading is hazardous to their financial wealth."

"The June 2001 issue of Smart Money reported that over the prior 15 years, the Mensa investment club returned just 2.5%, underperforming the S&P 500 Index by almost 13% per annum."

"For the 4 year period 1998-2001, the annualized return of the average mutual fund was 5.7%. Unfortunately, the average investor earned just 1%. It shows how costly investor behavior can be."

"Beat the market? The idea is ludicrous. Very few investors manage to beat the market. But in an astonishing triumph of hope over experience, millions of investors keep trying." (Jonathan Clements quote)

"Those who seek to exploit market anomalies almost inevitably find that the markets are tyrannical in their efficiency."

"People often see order where it doesn't exist and interpret accidental success to be the result of skill."

"People often treat the highly probable as certain and the improbable as impossible."

"Investors typically give too much weight to a recent experience."

"In the investment arena, large institutional investors dominate trading. -- thus the competition is extremely tough."

"Barra noted that a fairly typical small- or mid-cap stock fund -- could lose 3% to 5% per annum to market impact costs."

"Trading cost for mutual funds are on average even greater in magnitude than the expense ratio."

"There are no economic ideologies whose adherents produce consistently superior economic forecasts. -- Avoid market timers, for they promise something they cannot deliver." (Sheridan study)

"Titlock's (20 year study) found that the so-called experts who make prediction their business--appearing as experts on television and talk radio, being quoted in the press, and advising governments and business--are no better than the proverbial chimps throwing darts."

"There are no good economic forecasters, and the right strategy is to ignore all of them and stick to your well-developed plan."

"Galbraith (famous economist) stated: 'We have two classes of forecasters: those who don't know--and those who don't know they don't know."

"If we examine trends in information, communications, trading costs, and institutional ownership, it will be clear that the hurdles for active management are getting ever higher."

"The more empirical flaws that are discovered in the efficient market theory, the more robust the theory becomes." (Professor's Lee & Verbrugge quote)

"Trustees/investors who do not have the knowledge, skill, time, or interest to prudently manage a portfolio should delegate that responsibility to an adviser who does."

"It is difficult to get a man to understand something when his salary depends on his not understanding it." (Upton Sinclair quote)

"It is clearly in the interest of Wall Street to charge you 1.5% for underperforming actively managed funds rather than about 0.1% to 0.5% for index funds."

"For taxable accounts, taxes are often the greatest expense of active management."

"Often overlooked because it is hidden is the "cost of cash" (in a mutual fund)."

"Active investors are engaging in a massive transfer of wealth--about $80 billion annual from their own wallets to those of the purveyors of actively managed products and market makers."

"Investors must learn to act like a postage stamp--It sticks to its letter until it reaches its destination."

"Investors only activities should be rebalancing, tax-loss harvesting, and continuing to save and add to their portfolios."

"The strategy to get rich is entirely different than the strategy to stay rich."

"Prudent investors don't take more risk than they have the ability, willingness, or need to take."

"If you've already won the game, why are you still playing?"

"Psychologists have found that once you have enough money to meet basic needs like food, shelter,and safety, incremental increases have little effect on your happiness."

"It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office." (Paul Samuelson quote)

"Passive investing frees you from spending any time at all watching CNBC, studying charts, following Internet discussion sites, and reading financial publications that are basically not much more than the equivalent of astrology."

"The more complex the investment, the faster you should run away."

"If the security has a high yield, you can be sure the risks are high, even if you cannot see them."

"Hope is not an investment strategy."

"Owning individual stocks and sector funds is more akin to speculating, not investing."

"The four most dangerous investment words are This time it's different."

"Never work with a commission-based adviser. Work only with advisers who will provide a fiduciary standard of care."

"Despite the armies aligned against it, passive investing is the winning strategy, it is an idea whose time has come."

Thank you Larry Swedroe!

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"Simplicity is the master key to financial success." -- Jack Bogle

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Post by Jake46 » Sun Feb 06, 2011 2:44 pm

Perhaps the best compilation of evidence against active investing. Wonderful quotes.

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Post by bob90245 » Sun Feb 06, 2011 2:50 pm

Jake46 wrote:Perhaps the best compilation of evidence against active investing. Wonderful quotes.

Agreed. I've bookmarked this thread for future reference when someone doubts the efficiency of the markets.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Post by LadyGeek » Sun Feb 06, 2011 3:08 pm

It's now in the wiki.

Wiki article link: Taylor Larimore's Investment Gems

It's also available here (added earlier): Larry Swedroe
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Post by larry82 » Sun Feb 06, 2011 3:49 pm

many great quotes in there !

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Post by nisiprius » Sun Sep 11, 2011 6:52 am

I'd add that pages 154-158, thirty "Rules for Prudent Investing," are thirty gems in themselves.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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