- Monevator - https://monevator.com -

Weekend reading: The agony of alpha

What caught my eye this week.

I always stress to friends who know of my investing obsession that – from the position of pure cost-benefit analysis – my stockpicking has been an unproductive waste of time.

Me and The Accumulator thrashed this out in debate [1] years ago. I invest actively for the fun and challenge, I said. He wasn’t convinced.

And it’s true, I probably wouldn’t do it if I didn’t – naughtily, preposterously – think I had a chance of beating the market.

Luckily, I have done, the way I measure it, over the medium to long-term. (Unitised [2] and against a few 100% equity benchmarks, but I don’t adjust for risk, which could make things look better or worse, depending on the year).

2020 has been particularly ridiculous. Everything has worked! It usually doesn’t. Luck has loomed large, too. It doesn’t always, either! It went against me in late 2018 / early 2019, for example, and I spent the year trying to claw back and making things worse.

Swings and roundabouts.

The point is I always caution my friends it’s only in recent years (especially this year) that earning an extra 1%, 5% or for much of the time even 10% has compared at all favourably to trying to earn more money from a traditional route.

Focusing on a career and boosting my salary [3] would have paid far better, if I was wired that way. (I’m not [4]!)

I started with mid five-figures in savings less than two decades ago. I’ve never earned a lot, by the standards of my peers. Compound interest takes time. The metaphor is a slow rolling snowball for a reason.

Even putting more effort into monetizing that perennial underachiever, Monevator, might have been more profitable.

The irony of alpha

Nick Maggiulli did his usual brilliant job tackling all this in a post [5] this week. Explaining why You Don’t Need Alpha, Nick writes:

How many people have earned alpha (net of fees) consistently for multiple decades?

Conservatively, I would say there have been a couple hundred throughout history.

Being one of those people (or trying to select them ahead of time) is near impossible.

More importantly, how much will that alpha change your financial life even if you do happen to acquire it?

For a little bit of annual alpha, the answer is very little.

For example, let’s assume that the market will return 4% a year (after-inflation) going forward and you can earn 1% above this (net of fees) over the next 10 years.  How much more money would you have 10 years from now?

About 10% more.


Obviously you can play with these figures. You can model higher (and even more unlikely) alpha.

More – cough – realistically you can run the experiment for 30 years. It does add up.

But then you spent 30 years trying to beat the market when you might have been doing something else instead.

Where’s my novel, eh? That’s what the teenage me would want to know.

The irrelevance of alpha

I should mention my friends have typically needed little persuasion that I’ve wasted my time obsessing over the stock market.

I was living like a graduate student [6] well into my 40s. My friends didn’t see the sports cars they expected from an obsession with the stock market. (Because they didn’t understand that compounding your own modest wealth sensibly takes time. If you need a sports car in a hurry, get hold of other people’s money and take a cut…)

There was a particularly delusional air about proceedings as my last rental place was run down before I finally bought my flat.

“Where did it all go wrong?” they gently wondered.

The other reason they need little persuasion I’ve been a dud is I try to mostly talk about my mistakes and bad calls.

Superstitious! It’s grounding.

And… luck, luck, luck.

But despite all this I don’t feel I’ve wasted my time pursuing alpha. While I didn’t end up trying to launch/run a fund (another story) it’s led me in interesting directions, career-wise.

It also resulted in this blog, which judging by the generous feedback is my best contribution to the world so far.

Finally, shepherding my nest egg so closely has really made me care about my nest. I’ve added more eggs over time than perhaps I would have, too, and I’ve been careful – big picture – not to break them.

“It is the time you have wasted for your rose that makes your rose so important.”

The Little Prince [7]

Have a great weekend.

From Monevator

Freetrade: How to build your portfolio – Monevator [8]

From the archive-ator: Six reasons small cap shares can supercharge your returns – Monevator [9]


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1 [10]

Inheritance tax receipts fall for first time in a decade due to £1m own home limit – ThisIsMoney [11]

House prices bounced back in July but beware a ‘false dawn’, says Nationwide – BBC [12]

Cut in stamp duty has only really benefited London, says Zoopla – Guardian [13]

US economy plunges at a titanic 32.9% annualized rate in second-quarter – Market Watch [14]

Universal Credit requires £8bn overhaul, says cross-party report – Guardian [15]


The role of gold; a less than perfect inflation hedge – Advisor Perspectives [17]

More on gold: Sad Old Man Rocks making new high – The Reformed Broker [18]

Products and services

Will superfunds come to the rescue of UK pensions? [Search result]FT [19]

Savers warned not to be fooled by very short-term teaser rates of 1.45% – ThisIsMoney [20]

Car finance commission to be banned. How much will you save? – Which [21]

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade [22]

Argos to stop printing catalogue after almost 50 years – Guardian [23]

F&C flags 50th year of rising dividends after flat but furious first-half – CityWire [24]

Active Non-Transparent ETFs: What are they good for? [US but relevant]Morningstar [25]

Homes with curve appeal [Gallery]Guardian [26]

Comment and opinion

Avoiding the ugly scramble – Morgan Housel [27]

How to sell a house – Finumus [28]

Be aware the ‘I love me’ affect – Klement on Investing [29]

The permanent portfolio is on a roll – The Irrelevant Investor [30]

The 4% budget: Spending flexibility is more important than withdrawal rate – Vanguard blog [31]

How much should you spend on an engagement ring? – A Wealth of Common Sense [32]

Isaac Newton and the perils of the financial South Sea – Physics Today [33]

A billionaire created a perfect experiment by erasing $34m in student debt – Bloomberg [34]

Is ESG2 [35] a return factor [Nerdy, research]Research Affiliates [36]

Holidays in the sun are not a human right, people – Simple Living in Somerset [37]

Naughty corner: Active antics

Stranger things: Evaluating the value/growth divergence – Verdad [38]

Smithson IT closes in on £2bn: A deep dive – IT Investor [39]

Why famed Wall Street veteran Paul Tudor Jones got into Bitcoin – Institutional Investor [40]

A deep dive into the seasonality factor – Dual Momentum [41]

Cullen Roche interviewed by The Investor’s Podcast [Podcast]Pragmatic Capitalism [42]

Coronavirus corner


Half a year of wall-to-wall media coverage and people still wildly misunderstand the Covid-19 statistics – in particular the (tiny) risk of dying young – Advisor Perspectives [44]

R rate may be > 1 in England; possible exponential spread for first time since May – Guardian [45]

Visiting people at home banned in parts of Northern England – BBC [46]

Boris Johnson postpones wider easing of lockdown measures in England – CNBC [47]

The global struggle to produce enough disinfectant wipes to meet demand – Slate [48]

Kindle book bargains

Influence by Robert B. Cialdini – £0.99 on Kindle [49]

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig – £0.99 on Kindle [50]

I Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle [51]

Super Thinking by Gabriel Weinberg and Lauren McCann – £0.99 on Kindle [52]

Off our beat

Regulating technology [Deep dive]Benedict Evans [53]

How digital adverts subsidize the worst of the Web – Wired [54]

What changes [financially and otherwise] in the first year of marriage – New York Times [55]

Thinking for oneself – Farnham Street [56]

And finally…

“The absolute fundamental skill that underpins your success is your ability to spend less than you earn. This is surprisingly difficult for a great many people, but without this you’ve got literally nothing.”
– Pete Matthew, The Meaningful Money Handbook [57]

Like these links? Subscribe [58] to get them every Friday!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [ [61]]
  2. Environmental, Social, and Governance. [ [62]]