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The Quest for Alpha: The Holy Grail of Investing Hardcover – February 8, 2011
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“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."
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.
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. At the very least, more discussion about future scenarios in view of current circumstances would be in order. Otherwise, I would say that this book is well written.
For readers of this review who share my reservations on this book, please see my review of "Investing in the Age of Sovereign Defaults" by Peter Treadway.
Personally, if you have an interest in passive investing and don't need a lot of references to other author's works or studies, I'd recommend either of Richard Ferri's "The ETF Book" or "All About Asset Allocation". The first actually explains how indexes are constructed and the second provides some interesting portfolios.
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I don't like math, but I trust it. It is reliable.Read more