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The Quest for Alpha: The Holy Grail of Investing Hardcover – February 8, 2011
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— 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."
Top Customer Reviews
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.
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.Read more ›
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.
1. Buy index funds or ETFs rather than actively managed funds. This is backed by a lucid explanation along with signficant evidence.
2. If you choose to have someone else manage your money, then it should be a fee based manager and not the ordinary broker representative.
3. You can manage your own money if you can meet the criteria in Appendix B which includes that you have an interest in doing so, have the discipline, the knowledge base, as well as execute the rules in Appendix A which has 30 rules of investing.
The author offers model portfolios which include US stocks, International Stocks, Intermediate duration bonds, and S&P Commodity Index in different proporptions.
What worries me about the advice offered in this book, is that the portfolios were tested from 1975-2009. This excludes the 1973-1974 bear market which the author probably would have included if data had been available, Also, going forward we are in an era of enormous sovereign debts with inherent leverage and these portfolios may not work as well. Other asset classes may be needed depending on future economic scenarios and reactions in the financial markets. An example, I would offer would be gold and precious metals which may be useful to put in future portfolios. Gold and precious metals are not at all in the index of the book; even if the author feels that this asset class is a poor idea, I believe his thinking on the topic should have been discussed.
The author discusses about the desire to avoid risk once you have acqjuired wealth, however I am not sure his portfolios accomplish to the extent he believes going forward.Read more ›
Most Recent Customer Reviews
I'm a finance student. I read eleven research papers which are all quoted in this book. Is nice to see all the material I learned tied together so eloquently.Published 3 months ago by Dafne
A hilarious and entertaining book. This should be compulsory reading for finance professionals on the first day of the job.Published 4 months ago by Vlada Vujasinovic
Seems to be selling his company. Basic information but could not find what I wanted. No alpha for this book.Published 14 months ago by The Time Lord
Should be required reading before anyone can claim to know how to advise themselves or others on personal investing.Published 17 months ago by Cassandrus
I really liked this book because it bluntly tells people they're being ripped off by the financial industrial complex and has a lot of good quotes. Read morePublished on July 7, 2014 by Brian G. Ruschel
A must read for retirees as well as those still seeking that holy grail of investing: huge positive alpha. Read morePublished on February 2, 2014 by Charles D. Evans
Bought for husband. He said it was good reading..easy to comprehend and understand..I have no clue. ughh four more words.Published on September 24, 2013 by SUE ACKERMAN
There is much more of the same in The Quest for Alpha as Swedroe's previous writings. But it is very important to hear this message over and over with the latest studies and... Read morePublished on December 14, 2012 by Mark M.