Ben Hunt started a good conversation today about stock market returns and alpha. It started with this:
Alpha = private information. Period. Full stop.
I understand that we’d like to think that smarts + process + time = alpha. It’s one of the little lies that we tell ourselves to get through the day. Here’s the 10-year chart of Berkshire vs. S&P total return. Without private information (and often with it) THERE IS NO ALPHA.
And if you’re hoping for an active management renaissance … as passive, price-insensitive investing grows as a % of flows, alpha becomes *harder* to achieve, not easier. Alpha creation is not a mean-reverting phenomenon.
When did fundamental active management begin to die? In August 2000, when Reg FD made it illegal to get private information from public companies. If Reg FD dated back to 1980, you would have never heard of Peter Lynch and Warren Buffett.
People have been arguing the thread and the definition of the words ‘private information’ all day long and will argue this until the end of time, but I am in agreement with Ben as to alpha.
I was crazy/silly enough to start a hedge fund in 1998, especially without an edge in private information. I am glad that I don’t have to compete against the S&P anymore.
Picking stocks is a really fun hobby, and if you can afford it…lifestyle, but it was a terrible career decision.
I love my life as a founder and angel.
The alpha seems endless and indexing is still years away (though it is coming).
Back in 2013 I wrote that ‘Alpha Was In Your Eyes and Your Feet‘. The post is still timely and relevant.
Building private information…with your own eyes, ears and feet…through your global social networks and passionate pursuit of domain experience is how you ‘out’ Warren Buffett all the wannabe Warren Buffett’s.