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The Quest for Alpha: The Holy Grail of Investing

ISBN: 978-0-470-92654-3
208 pages
February 2011
The Quest for Alpha: The Holy Grail of Investing (0470926546) cover image
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.

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Acknowledgments.

Introduction.

The Holy Grail.

The Quest Begins.

Chapter 1 Mutual Funds: The Evidence.

When You Wish Upon a Morningstar.

Focus Funds.

Active Management of Bond Funds.

Skill Versus Luck.

Who Carea about the Average Fund?

With Active Managers, How Long Is Long Enough? 

Advice from Professional Investors and Academics.

Admissions from Industry Practitioners and the Financial Media.

Chapter 2 Pension Plans: The Evidence.

Counterproductive Activity.

The Value of Consultants.

The Performance of Funds Offered by 401(k) Plans.

Fund Selection Skills.

Please Don't Do Something, Stand Still.

Advice from Professional Investors.

Admissions from an Industry Practitioner.

Chapter 3 Hedge Funds: The Evidence.

The Problems With Hedge Funds.

Advice From Professional Investors and Academics.

Chapter 4 Private Equity/Venture Capital: The Evidence.

Characteristics of Private Equity Returns.

Bias in the Data.

Advice from a Professional Investor.

Chapter 5 Individual Investors: The Evidence.

Investment Returns Versus Investor Returns.

Advice from Professional Investors and Academics.

Admissions from Industry Practitioners and the Financial Media.

Chapter 6 Behavioral Finance: The Evidence.

There Is Smoke, But No Fire.

The Tyranny of the Efficient Markets.

Further Evidence.

The Failed Quest.

The Value of Behavioral Finance.

Even Smart People Make Mistakes.

Admissions from Industry Practitioners.

Summary.

Chapter 7 Why Persistent Outperformance is Hard to Find.

The Quest for Alpha Is a Game Played on a Different Field.

Successful Active Management Sows the Seeds of Its Own Destruction.

Closet Indexing.

Concentration and the Role of Trading Costs.

The Role of Trading Costs.

Drifting Out of Small Caps.

Encore Performances.

Who Gets the Money to Manage?

The Value of Economic and Market Forecasts.

The Value of “Expert” Judgment.

We All Want to Believe.

The Value of Security Analysis.

Buy, Sell or Hold.

The Hurdles Are Getting Higher.

Advice from Professional Investors and Academics.

Admissions From Industry Practitioners and Academics.

Chapter 8 The Prudent Investor Rule.

The Prudent Investor Rule.

The American Law Institute.

The Uniform Prudent Investor Act.

Chapter 9 Whose Interests Do They Have at Heart?

Advice From Professional Investors.

Admissions From Industry Practitioners and Academics.

A Triumph of Hope Over Experience.

The Arithmetic of Active Management.

The Math Is Always the Same.

The Costs of Active Investing.

The Cost of Cash.

An Expensive Quest.

Summary.

Chapter 10 How to Play the Winner's Game.

Indexing Is More Than the S&P 500 Index.

Does Passive Investing Produce Average Returns?

Enough.

Needs Versus Desires.

Pascal's Wager.

Conclusion.

The Yale Endowment Fund.

The Way to Win Is Not to Play.

The Quest for the Holy Grail.

The Winner's Game.

Appendix A Rules of Prudent Investing.

Appendix B Doing It Yourself.

Notes.

Sources of Data.

About the Author.

Index.

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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.
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“As I noted recently, success in investing is somewhat counterintuitive, and requires most investors to set aside their pre-conceived notions of how to build a portfolio that will allow them to reach their goals. The task is made all the harder because the vast majority of the participants in the financial services industry spend hundreds of millions of dollars annually reinforcing the myth of active management. Fortunately for investors, experts like Larry Swedroe are hard at work pointing out the fallacies of those myths, while also detailing the undeniable logic and mathematics that underpin a passive approach. The Quest for Alpha is a wonderful addition to that effort, and investors will be well-rewarded by reading it and acting upon its wisdom.”
— Nathan Hale, moneywatch.com, March 2011
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