The Quest for Alpha: The Holy Grail of Investing (Bloomberg) [Hardcover]

Larry E. Swedroe (Author)

Book Description

Publication Date: February 8, 2011 | Series: Bloomberg (Book 130)

The final word on passive vs. active investing

The 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 Plan

Investors 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.

Editorial Reviews

Review

“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 alpha—returns 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 efficient—the 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."

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Product Details

• Hardcover: 208 pages
• Publisher: Bloomberg Press; 1 edition (February 8, 2011)
• Language: English
• ISBN-10: 0470926546
• ISBN-13: 978-0470926543
• Product Dimensions: 6.1 x 0.8 x 8.9 inches
• Shipping Weight: 12.8 ounces (View shipping rates and policies)
• Average Customer Review: 4.7 out of 5 stars  See all reviews (24 customer reviews)
• Amazon Best Sellers Rank: #305,598 in Books (See Top 100 in Books)

More About the Author

Larry Swedroe is principal and director of research for Buckingham Asset Management, LLC, a Registered Investment Advisor firm in St. Louis, Mo. He is also principal of BAM Advisor Services, LLC, a service provider to investment advisors across the country, most of whom are affiliated with CPA firms. Previously, Larry was vice chairman of Prudential Home Mortgage. Larry holds an MBA in finance and investment from NYU, and a bachelor's degree in finance from Baruch College.

Most Helpful Customer Reviews

26 of 26 people found the following review helpful

3.0 out of 5 stars Not that much new and useful June 4, 2011

By Terry I.

Format:Hardcover|Amazon Verified Purchase

The Quest for Alpha presents a thorough and convincing viewpoint that passive management is preferable to active management. Mission accomplished. However, much of this was presented in previous books by the author and I did not find a new book on that subject to be that valuable. I have no dispute with the premise, examples and conclusions. If your only reason for studying this book is to make a decision on passive versus active investing, then this book deserves 5 stars.

However, I was hoping for some updated information in how to proceed creating an investment portfolio, and this book did not satisfy that need. It does not address evaluating when a passive approach might not provide exposure to the market segment you want.

Previous books by Swedroe, specifically Winning Bond Strategy(2006) and Winning Investment Strategy(2005) are much better but now getting a little dated for the current investment climate. I was hoping for some updated guidelines on asset allocation for equity and fixed income investments. However, in the absence of an update, these books are the best I have come across and I recommend them highly. For instance, Winning Investment Strategy takes the asset allocation for equities a step further than most sources and delves into the allocation for small and large capitalization equities, including value vs growth equities. It also includes allocations for international equities, emerging markets, and REITs. Winning Bond Strategy is not as useful because it does not include specific recommendations for the investments in a fixed income portion of a portfolio, but it still provides a good explanation of the various options.

28 of 30 people found the following review helpful

5.0 out of 5 stars A Neverending Quest April 3, 2011

By Philip Stein

Format:Hardcover

Beginning with the Cowles Commission in the early 1930s, academics have been searching for ways to identify money managers who could persistently generate above-market returns. Eighty years have passed and they are still searching. In fact, many have concluded that market-beating managers are about as common as four-leaf clovers, and the very few who do succeed cannot be identified in advance. With the advent of the Efficient Market Hypothesis in the 1960s, emphasis shifted to understanding why the market is so hard to beat. This research has provided the intellectual foundation for passive investing.

In his new book, "The Quest for Alpha", author Larry Swedroe highlights many studies performed over the past several decades which overwhelmingly reach the same conclusion: returns in excess of market averages (alpha), net of expenses, are exceedingly difficult to achieve over long periods of time, and any attempts to beat the market will likely result in disappointment. It is hard not to draw the same conclusion yourself after reading this book. Apparently, researchers have not found evidence of skilled alpha-generating managers after studying mutual funds, pension plans, private equity/venture capital, and, yes, hedge funds. Mr. Swedroe admonishes us to not become too enamored with the mystique of hedge funds. Hedge fund performance is reported voluntarily and it is not likely that funds destined for extinction will bother reporting sub-par returns. This makes data on hedge fund performance exceedingly biased. Yet in spite of this bias, the long-term return of the average hedge fund is still nothing to write home about. A two percent expense ratio and 20% of profits is a tremendous hurdle to overcome and no guarantee of market-beating performance (assuming your hedge fund even lasts long enough to acquire a long-term record.)

Author Swedroe instructs his readers to consider that beating the market is not as straightforward as it may initially appear. First, it is necessary to realize that only risk-adjusted returns are meaningful. One of the fundamental lessons we learn about investing is that risk and return are inextricably bound in a lovers embrace. Any manager who invests in riskier assets, say small cap stocks, would be expected to achieve a greater long run return than another manager who invests in less risky assets, say large cap stocks. In this example, achieving a greater long run return does not indicate that the former manager has greater skill than the latter, merely that the yin and yang of risk and return has asserted itself.

Another point which the author drives home is that the frequency of outperformance by a skilled manager must be greater than what would be expected by chance; otherwise, we can't conclude that the manager has skill as opposed to luck. While no one doubts that there are many investment managers who beat the market in any given one-, three-, or five-year period, the roster of winners is always changing. Given that thousands of people manage money for a living, it is reasonable to expect that many will achieve market-beating returns over shorter time periods due solely to the randomness of outcomes - much as would be expected in a coin-flipping contest.

Fans of Larry Swedroe's other books will not be surprised at the conclusions he draws from the numerous studies cited in his latest work: have a good investment plan, invest in a globally diversified portfolio of low-cost index funds and ETFs, rebalance periodically, and stick to your knitting during the bad years. There are no money managers who will enable you reach your financial goals more quickly with less risk. And if they exist, we will likely not know who they are until hindsight identifies them in the future. Trying to identify them in advance will likely lead to dead ends - and sub-par returns.

Passive investing has its critics, many of whom assert that you are settling for average returns and can do better. Swedroe counters this claim with his own assertion that passive returns are not average returns - they are market returns. And active managers often generate below-market returns due primarily to the costs they incur while attempting to generate alpha. This point cannot be overemphasized.

So, what about Warren Buffet? Doesn't this greatest living investor negate the conclusions drawn from study of the academic literature? Swedroe states that if you look in the mirror and see Warren Buffet staring back at you, then go for it. Otherwise, take the sage advice from the Oracle of Omaha himself and invest primarily in index funds. It is worth noting that Warren Buffet is not a trader and doesn't jump from one stock to another in an attempt to generate alpha. In fact, he tends to hold his investments for long periods of time - measured sometimes in decades, not years. If you wish to emulate Mr. Buffet, consider behaving accordingly.

18 of 21 people found the following review helpful

5.0 out of 5 stars A Swedroe Fan January 30, 2011

By Mark W. Cooper

Format:Kindle Edition|Amazon Verified Purchase

First of all; I am a Larry Swedroe fan. I have read every one of his books and follow his blog. I believe he is one of the top financial/investing writers for the small investor. I refer to his prior book "The Only Guide to Alternative Investments" on a regular basis.
If you have read some of his prior books, this is a re-hash of his general principles of investing... know the risks of your investments, financial and economic predictions are bunk, costs matter.
If you haven't read his prior books, a nice review of the financial industry; how investor psychology leads us astray. Fun to read. If you want specific investing advice, look at some his other publications.