Generating Alpha
“How do you generate alpha in such a competitive market where everything is priced in?”
I was recently asked this question by a new hire at well-known NY shop, and it got my gears turning.
“I don’t generate alpha, the management I select does,” I replied. The idea that an investor is the generator of alpha is a misconception that elicits the deadliest of all investment sins: forced action.
You see, the world equates effort to results, and in many instances, that is true, but not for investing. This is one of the reasons I believe the highly educated struggle with investing. In order to be good academically, you have to learn how to hack the test, and to a degree, the professor. You have to generate results through effort. You cannot hack the market, or force your will upon it. The market has no bias towards lazy investors, and no preference for a pet either. It actually rewards the lackadaisical, for greed, fear, and effort, are mitigated through a passive attitude of electing others, and sitting.
When I first started investing, I was very lucky on the mentorship side. I was able to tinker, test, and talk with a brilliant investor who happened to be in the same office building as my father. One day, out of frustration, I called him and asked, “what do you do all day?”
“I read,” he replied.
It was then I saw the non-correlation between action, those digging for returns, and those who position themselves for the future, and sit.
Do not think about generating alpha. Do not generate anything, for the investor has the privilege of delegating that hard task to others.
My next article.
I apologize for my absence. I will type the words that I will try to write on a schedule, but I won't. However, my next full-length article, “Developing Dogma” will be out shortly. The article is a brief look at history’s lasting investment principles, how you can incorporate them into your strategy, and reasons why they are worth following.