The quest for alpha : the holy grail of investing

113 Pages·2011·0.59 MB·English

by  Swedroe

Contents
Acknowledgments
Introduction
Chapter 1: Mutual Funds: The Evidence
When You Wish upon a Morningstar
Focus Funds
Active Management of Bond Funds
Skill versus Luck
Who Cares about the Average Fund?
With Active Managers, How Long Is Long Enough?
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 There
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 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
Appendix A: Rules of Prudent Investing
Appendix B: Doing It Yourself
Notes
About the Author
Index

Copyright © 2011 by Larry E. Swedroe. All rights reserved.
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Data in tables in Chapters 3 and 10 used with permission of MSCI. This is the
exclusive property of MSCI Inc. (“MSCI”) and may not be reproduced or
redisseminated in any form or used to create any financial products or indices
without MSCI’s prior written permission. This information is provided “as is”
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Data for tables in Chapter 10 used with permission of CRSP. Calculated (or
Derived) based on data from CRSP US Stock Database © 2010 Center for
Research in Security Prices (CRSP®), Graduate School of Business, The
University of Chicago.
Library of Congress Cataloging-in-Publication Data:
Swedroe, Larry E.
The quest for alpha : the holy grail of investing / Larry E. Swedroe.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-470-92654-3 (cloth); 978-1-118-00569-9 (ebk); 978-1-118-00570-5
(ebk); 978-1-118-00568-2 (ebk) 1. Investments. 2. Investment analysis. 3.
Portfolio management. I. Title.
HG4527.S944 2011
332.6—dc22
2010034716
This book is dedicated to my three daughters, Jodi Rosen, Jennifer Morris,
Jacquelyn Swedroe; my sons-in-law Jay Rosen and Matt Morris; and my three
grandchildren, Jonathan, Sophie Rosen, and Ruby Jane Morris. You have all
brought great joy to my life.