The Quest for Alpha by Larry E. Swedroe

Author:Larry E. Swedroe [Swedroe, Larry E.]
Language: eng
Format: mobi
Publisher: John Wiley & Sons, Inc.
Published: 2010-12-15T21:00:00+00:00

We All Want to Believe

In early 2009, I was in Baltimore giving a seminar for the investment clients of a CPA firm. My talk was called “The Winning Investment Strategy.” The talk focused on the building of a globally diversified portfolio of passively managed funds (such as index funds and exchange-traded funds) tailored to an individual’s unique ability, willingness, and need to take risk. I also discussed the importance of integrating an investment plan into a well-developed estate, tax, and risk management (insurance of all types) plan. And I discussed the need to have the discipline to ignore all the economic and market forecasts that you hear from the financial media and Wall Street, which can lead you to abandon your plan.

I explained that the reason you should ignore all economic and market forecasts is that the academic literature has concluded that there are no good economic and market forecasters. I presented the aforementioned findings by Sherden as well as his recommendations. I also provided further supporting evidence.

Despite my comments, the first question I received went like this: “What do you think is going to happen to the economy and the market over the next few months?” Since I always have an opinion (though I have learned never to act on my opinions, as they have no value), I was about to provide it. But I caught myself and instead responded: “I would be happy to give you my opinion, but why would you care? I just explained that there are no good economic forecasters, and the right strategy is to ignore all of them and stick to your well-developed plan.”

I continued: “I have served as an economist, run trading rooms for major financial institutions, and provided economic forecasts to major corporations. When I got the forecast right, I would congratulate myself on how smart I was. When the forecast turned out wrong, I would blame it on bad luck—something happened that was impossible to have forecasted. Of course, if you keep doing that, at the end of the day you can call yourself a genius. I learned that it was always luck.”

I also learned this important lesson. No matter how much we would like to believe otherwise, there is only one person who knows where the economy and the market are headed—and I don’t get to talk to that person. And neither does anyone else, which is why one of my favorite quotations on the value of expert forecasts is: “No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.”19

In continuing our quest to understand why persistent alpha is so hard to find, we will consider a case study on the value of security analysis.

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