Christopher M. Schelling - Better than Alpha: Three Steps to Capturing Excess Returns in a Changing World

Copyright 2021 by Christopher M. Schelling. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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During my career, I have worked with some fantastic investors, mentors, and colleagues, all of whom together are too numerous to list. But I would be remiss if I didnt explicitly thank Keith Black and TJ Carlson. No one has been more instrumental in my approach to research and investing than Keith, nor anyone so influential to my thoughts on management and governance as TJ. I am indebted to both.

Of course, I must thank my editor Stephen Isaacs and the rest of the team at McGraw Hill for shepherding an entirely unprepared new author through the publishing process. His patience and counsel have been much appreciated. I have also been fortunate enough to profit from the confidence placed in me as a writer and the generous benefit of helpful edits over the years by my colleagues at Institutional Investor, namely Mimi Chiahemen for her tireless support, Amanda Cantrell for her unerring improvements to my work, and of course Leanna Orr and Kip McDaniel for their leadership. I would not be an author without them.

This book was also immeasurably improved by the input of several friends who generously gave of their time to read drafts of the manuscript and make helpful suggestions along the way, including Brian Portnoy, Gailen Krug, Bruce Cundick, Ben Happ, and last but most emphatically not least Tom Masthay. I greatly appreciate their insights.

Lastly, to my readers: Writing a book on investments is an act of hubris, insanity, or most likely some combination of the two. Ill leave it to you to decide which relative proportions apply in this case, but Im incredibly grateful for your attention nonetheless. I can say with absolute certainty I have learned far more from writing this than you will from reading it, so thank you for indulging me.

Tactics without strategy is the noise before defeat.

SUN TZU

Whether you are a young employee entering the workforce and beginning to save for retirement, a middle-aged executive putting money aside for college tuition for your kids, or a pension plan manager investing billions to generate the income that retired pensioners will use to pay for their groceries and mortgages, we all need to invest. But figuring out how isnt so easy.

One of the challenges consumers of financial products face, individuals and institutions alike, is deciphering the seemingly unending stream of acronyms, buzzwords, and professional jargon created by this increasingly specialized and technical industry. Too often, the point is not to move toward clarity for clients, but rather to create confusion and opacity by drowning them in interminable verbosity.

After all, an uninformed and confused client makes for a more profitable counterparty, just like the easy mark at the poker table. If people dont fully understand what they are buying, and cant assess the relevant risk and potential conflicts of interest, they certainly wont be able to appropriately price the asset or service.

Complexity is beguiling. It could be the synthetic collateralized debt obligations that were marketed and sold by investment banks during the global financial crisis as high-quality bonds despite being made up of credit default swaps, which themselves were derivatives of other underlying shaky loans. Or it might be a relative-value hedge fund with thousands of line items across dozens of strategies and little transparency other than the impressive math credentials of the founders and some aggregated risk statistics. But as a result of this complexity, the Street usually gets the investor to overpay.