“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 Inside Flap
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 alphareturns 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 efficientthe 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."