Larry E. Swedroe - The Incredible Shrinking Alpha: How to be a successful investor without picking winners

The Incredible Shrinking Alpha

Second edition

How To Be A Successful Investor Without Picking Winners

Larry E. Swedroe and Andrew L. Berkin

Contents

About the Authors

Acknowledgments

Foreword by Gus Sauter

Preface

Introduction: The Active Versus Passive Debate

Chapter 1: The Quest For The Holy Grail: What Was Once Alpha Becomes Beta

Asset pricing models

Explaining Buffetts alpha

Bond investing

The twenty dollar bill

Chapter 2: The Pool Of Victims Is Shrinking

The trend is not the friend of active investors

The rise of passive investing contributes to market efficiency

The good news

A vicious circle

Chapter 3: The Competition Is Getting Tougher

Game theory and investing

The paradox of skill

Diseconomies of scale and fund performance

Decreasing returns to scale

What about Warren Buffett?

The success of the Yale Endowment

The performance of institutional money managers

The nature of the competition

Successful active management contains the seeds of its own destruction

The next Peter Lynch?

The benefits provided by active investors

Chapter 4: Is The Market For Alpha Overgrazed?

Increased supply of capital chasing shrinking pool of alpha

What if everyone indexed?

Chapter 5: Why Do Investors Ignore The Evidence On Actively Managed Funds?

The black hole of knowledge

Explanations from academic research

Its hard to admit we are wrong

Chapter 6: What You Can Do

1. What risks to take and how much of them?

2. Diversify your risks

3. Invest in systemically managed (structured) funds

4. Keep your costs low

5. Stay disciplined

Factor Fimbulwinter

Diversification means being uncomfortable

Summary

Chapter 7: Asset Allocation

Introduction to asset allocation

The three tests

Asset allocation decisions

Implementation

Recommended mutual funds and ETFs

A living document

The care and maintenance of the portfolio

Conclusion

Appendix A: Does Indexing/Passive Investing Get You Average Returns?

Appendix B: Active Management: The Odds Of Achieving Portfolio Alpha

Appendix C: The Value Of Security Analysis

Buy, sell or hold

Appendix D: The Performance Of Active Managers In Bear Markets

Appendix E: For Actively Managed Funds How Long A Track Record Is Enough?

The 44 Wall Street Fund

The Lindner Large-Cap Fund

The Legg Mason Value Trust Fund

The Tiger Fund

Appendix F: Should Investors Prefer Dividend-Paying Stocks?

Dividend policy irrelevant to stock returns

The math of cash dividends versus home-made dividends

The explanatory power of dividends

Taxes matter

The evidence

The dividend disconnect

Implications

Attempting to explain the preference for dividends

Conclusion

Appendix G: Are Professional Investors Prone To Behavioral Biases?

Supporting evidence

Glossary

References

Publishing details

Praise for the first edition of The Incredible Shrinking Alpha

If you think you can beat the market, you need to read this wise book. Swedroe and Berkin show that whatever superior investment performance you may achieve is fully accounted for by the risks you are taking with your money and even risk compensation may be shrinking as well. But there are things you can do, and the authors suggest a number of sensible strategies to improve investm ent results.

Burton Malkiel, author of A Random Walk Down Wall Street

In this short but powerful book, Swedroe and Berkin have advanced the debate on active v. passive to a new level. Their discussion of how alpha (beating the market) has steadily morphed into beta (achieving market returns) is the best description Ive read of this process yet. No polemics here, just a data-centered exposition of the issuesthe longtime trademark of La rry Swedroe.

Edward Wolfe, Professor Emeritus of Finance, Western Kentucky University

Swedroe and Berkin roll up their sleeves and dig into decades of research to help us better understand how markets work. The result is a clear and concise synthesis of how investing can indeed be a winners game. Read, study and apply the ir approach.

Tobias Moskowitz, Fama Family Professor of Finance, University of Chicago Booth School of Business, and Managing Director, AQR Capital Management

Swedroe and Berkin provide a concise treatment of the research passive and active investors (both individual and institutional and also financial advisors) need to become more successful. This treatment also appeals to college finance students seeking to gain a better understanding of passive versus active investing, along with the correct answers. The authors enable investors seeking to generate real alpha to understand that passive investing is increasingly the correct approach, while active investing is just t he opposite.

John Haslem, Professor Emeritus of Finance, University of Maryland, Robert H. Smith School of Business, and editor/author of Mutual Funds: Portfolio Structures, Analysis, Management, And Stewardship

Based on decades of research and my personal experiences, I too gave up the quest for alpha long ago. I hold an endowed chair in investments and am a member of The Wall Street Journal Experts panel. Yet, I do not own a single individual stock or corporate bond. Rather, I invest in low-cost passive mutual funds and ETFs. Swedroe and Berkin demonstrate how this strategy can be used to achieve a prudent, globally diversified portfolio. Their book could well end up saving you a lot of moneyyour moneyand giving you a lot o f free time.

William Reichenstein, Investment Professor at Baylor University

Ever wonder why your actively managed funds almost invariably disappoint you? Piece by piece, the authors peel back the claims that active managers can add value in a system where it gets harder and harder to generate Alpha. In a world where academic research uncovers the true sources of return and markets relentlessly become more efficient, whats an investor to do? Go passive! Swedroe is the master of explaining financial research in terms that every reader can easily understand. Read and improve your finan cial acumen.

Francis Armstrong III, author of The Informed Investor and Investment Strategies For The 21st Century

Praise for the second edition of The Incredible Shrinking Alpha

For over half a century, academics and practitioners have debated the very nature of markets. Berkin and Swedroe guide us through this labyrinth of literature to reach one clear conclusion: what once was opaque, expensive alpha is now transparent, low-cost beta. Providing a framework for how and where to put that knowledge into actionand how investors can avoid playing the losers gameis where this book re ally shines.

Corey Hoffstein, Co-founder & CIO, Newfound Research

Berkin and Swedroe knock it out of the park with The Incredible Shrinking Alpha . The authors provide an incredibly thorough and balanced summary of the research on the challenges faced by active asset management. I learned a lot from this book and I think you will t oo. Read it.

Wesley R. Gray PhD, CEO of Alpha Architect, and co-author of Quantitative Value and Quantitative Momentum

Over the last decade investors have benefitted from abandoning active stock pickers in droves. Packed with brand new studies brought to life by helpful anecdotes, this book promises to turbo-charg e the trend.