The Quest for Alpha The Holy Grail of Investing

by Swedroe, Larry E.

• ISBN13: 9780470926543
• ISBN10: 0470926546
• Edition: 1st
• Format: Hardcover
• Copyright: 2011-02-08
• Publisher: Bloomberg Press

Summary

The final word on passive vs. active investingThe debate on active investing-stock picking and market timing-versus passive investing-markets are highly efficient and almost impossible to outperform-has raged for decades. Which side is right? In The Quest for Alpha: The Holy Grail of Investing, author Larry E. Swedroe puts an end to the debate, proving once and for all that active investing is likely to prove futile as the associated expenses-costs, fees, and time spent analyzing individual stocks and the overall market-are likely to exceed any benefits gained. The book Presents research, data, and quotations that reveal it's extremely difficult to outperform the market Explains why investors should 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 Other titles by Swedroe: The Only Guide to Alternative Investments You'll Ever Need and The Only Guide You'll Ever Need for the Right Financial PlanInvestors are on a never-ending search for a money manager who will deliver returns above the appropriate risk-adjusted benchmark, aka the "Holy Grail of Investing." The Quest for Alpha demonstrates that it's a loser's game-while it's possible to win, it's so unlikely that you shouldn't try.

Author Biography

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.

Table of Contents

Acknowledgments

Introduction

The Holy Grail

The Quest Begins

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

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

Hedge Funds: The Evidence

The Problems With Hedge Funds

Advice From Professional Investors and Academics

Private Equity/Venture Capital: The Evidence

Characteristics of Private Equity Returns

Bias in the Data

Advice from a Professional Investor

Individual Investors: The Evidence

Investment Returns Versus Investor Returns

Advice from Professional Investors and Academics

Admissions from Industry Practitioners and the Financial Media

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

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

The Prudent Investor Rule

The Prudent Investor Rule

The American Law Institute

The Uniform Prudent Investor Act

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

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

Rules of Prudent Investing

Doing It Yourself

Notes

Sources of Data

Index

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