After reading an article covering the hunt for positive alpha and the unanticipated outcome of negative alpha it should come as know surprise to you that I am often amused at the army of academic that speak broadly on the subject of alpha, rely on academic credential to suggest expertise, pepper the conversation with quantitative catchphrases and deliver the whole mess with swashbuckling confidence. Baloney! Alpha is alpha and with the benefit of having managed more than a few billion dollars in assets in my life I unashamedly admit that sometimes I find, what I'm sure is, alpha, but I don't know what to do with it. Hence my frequent look back. And I wholesale disagree with any notion that the past is no indicator of the future. To suggest such would be to suggest that mankind learns nothing from all mistakes and only something from all successes are original. I think mandkind learns nothing from nothing, because something can only come from nothing.
Permit me one illustration. From 1982-1995 Bond prices & interest returned 4% and 10% respectively. Stocks prices and dividends returned 10% and 4% respectively. See where I’m going here? Street consensus suggests that the current statistics for Bonds is 0% and 6% versus 6% and 2% for Stocks. The edge (i.e. alpha) favors stocks. Is the street correct?
Stocks do not always outperform Bonds and diversification (correlation risk) is not as efficient as asset allocation (volatility risk) to which discipline is our master, there is long term historical evidence. Call it extrapolating (or otherwise) there is no evidence to suggest that certain phenomenon can’t happen in the future solely on the virtue that they happened in the past.. By the way, ask any bond manager (the original quantitative and technical analysts) if bonds were set to outperform stocks in 2000. That wasn’t hope, a contrarian view (which is a behavioral weakness) or academic prowess; it was good old fashioned common sense.
Permit me one illustration. From 1982-1995 Bond prices & interest returned 4% and 10% respectively. Stocks prices and dividends returned 10% and 4% respectively. See where I’m going here? Street consensus suggests that the current statistics for Bonds is 0% and 6% versus 6% and 2% for Stocks. The edge (i.e. alpha) favors stocks. Is the street correct?
Stocks do not always outperform Bonds and diversification (correlation risk) is not as efficient as asset allocation (volatility risk) to which discipline is our master, there is long term historical evidence. Call it extrapolating (or otherwise) there is no evidence to suggest that certain phenomenon can’t happen in the future solely on the virtue that they happened in the past.. By the way, ask any bond manager (the original quantitative and technical analysts) if bonds were set to outperform stocks in 2000. That wasn’t hope, a contrarian view (which is a behavioral weakness) or academic prowess; it was good old fashioned common sense.
