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.
Table of Contents:
Acknowledgments xi
Introduction xiii
The Holy Grail xiv
The Quest Begins xvi
Chapter 1 Mutual Funds: The Evidence 1
When You Wish upon a Morningstar 2
Focus Funds 4
Active Management of Bond Funds 6
Skill versus Luck 8
Who Cares about the Average Fund? 12
With Active Managers, How Long Is Long Enough? 12
Advice from Professional Investors and Academics 15
Admissions from Industry Practitioners and the
Financial Media 17
Chapter 2 Pension Plans: The Evidence 23
Counterproductive Activity 25
The Value of Consultants 27
The Performance of Funds Offered by 401(k) Plans 27
Fund Selection Skills 29
Please Don’t Do Something, Stand There 30
Advice from Professional Investors 30
Admissions from an Industry Practitioner 31
Chapter 3 Hedge Funds: The Evidence 33
The Problems with Hedge Funds 36
Advice from Professional Investors and Academics 40
Chapter 4 Private Equity/Venture Capital:
The Evidence 43
Characteristics of Private Equity Returns 46
Bias in the Data 48
Advice from a Professional Investor 49
Chapter 5 Individual Investors: The Evidence 51
Investment Returns versus Investor Returns 54
Advice from Professional Investors and Academics 56
Admissions from Industry Practitioners and the Financial Media 59
Chapter 6 Behavioral Finance: The Evidence 61
There Is Smoke, but No Fire 62
The Tyranny of the Efficient Markets 63
Further Evidence 64
The Failed Quest 65
The Value of Behavioral Finance 66
Even Smart People Make Mistakes 66
Admissions from Industry Practitioners 68
Summary 69
Chapter 7 Why Persistent Outperformance Is Hard to Find 71
The Quest for Alpha Is a Game Played on a Different Field 72
Successful Active Management Sows the Seeds of Its Own Destruction 74
Closet Indexing 76
Concentration and the Role of Trading Costs 77
The Role of Trading Costs 78
Drifting Out of Small Caps 79
Encore Performances 79
Who Gets the Money to Manage? 81
The Value of Economic and Market Forecasts 83
The Value of “Expert” Judgment 86
We All Want to Believe 89
The Value of Security Analysis 90
Buy, Sell, or Hold? 92
The Hurdles Are Getting Higher 93
Advice from Professional Investors and Academics 94
Admissions from Industry Practitioners and Academics 96
Chapter 8 The Prudent Investor Rule 103
The Prudent Investor Rule 106
The American Law Institute 106
The Uniform Prudent Investor Act 108
Chapter 9 Whose Interests Do They Have at Heart? 113
Advice from Professional Investors 114
Admissions from Industry Practitioners and Academics 115
A Triumph of Hope over Experience 120
The Arithmetic of Active Management 121
The Math Is Always the Same 123
The Costs of Active Investing 124
The Cost of Cash 126
An Expensive Quest 127
Summary 129
Chapter 10 How to Play the Winner’s Game 133
Indexing Is More than the S&P 500 Index 135
Does Passive Investing Produce Average Returns? 140
Enough 141
Needs versus Desires 144
Pascal’s Wager 145
Conclusion 147
The Yale Endowment Fund 148
The Way to Win Is Not to Play 149
The Quest for the Holy Grail 150
The Winner’s Game 151
Appendix A: Rules of Prudent Investing 153
Appendix B: Doing It Yourself 159
Notes 165
Sources of Data 176
About the Author 177
Index 179
About the Author :
LARRY E. SWEDROE is a principal and the Director of Research for the Buckingham Family of Financial Services, which includes Buckingham Asset Management and BAM Advisor Services. He has also held executive-level positions at Prudential Home Mortgage, Citicorp, and CBS. Swedroe frequently speaks at financial conferences throughout the year and writes the blog "Wise Investing" at CBS MoneyWatch.com.
