Here is an excerpt from Henrik Andersson, BeyondProxy of a book review on The Incredible Shrinking Alpha: And What You Can Do to Escape Its Clutches by Larry E Swedroe and Andrew L Berkin, followed by a little something from amazon.
It was with an uneasy feeling I began reading this book, due to several factors. The title, book jacket flak, previous work by one of the authors and the other author´s occupation were just a few of the reasons for my queasiness. And it is fair to say that those did not ease after reading the book three times (the book is only a 100-odd pages). The main problem with the book is not the fact that it really is a massive Wikipedia-like dive into the Efficient Market (EMH) corner of SSRN.com and previous books & blogposts. That sin has been committed before and is not cause for too much disdain. No, it is the blending of correlation and causation, facts and fiction, ex-post and ex-ante and just large-scale confusion of who this book is really for, that leads to disappointment.
A “Carol Loomis disclosure” is justified here. This reviewer has a day job of gracing the savannah of active equity management. Hence, there is a sea of behavioral traps to fall into. But while the books by John Bogle and Charles Ellis have deeply resonated with me, and added to the thinking around the strength and weakness of indexation, this book merely comes across as trying to make a quick buck. The book´s purpose is to show that active management is futile and as “alpha has become beta” those futile odds have been lowered even more compared to the 1950s. As such, the acclaims on the book-cover come exclusively from like-minded “EMH-believers”, mostly academics and market pundits. And even though the theories around EMH has been treated harshly in what some have labeled the real world, its supporters have found an emergency exit in the short-comings of active management (as in deviation from an index via fundamental analysis of businesses), thereby finding new use for the theory. But – as has been stated before – this underperformance does not prove anything other than that costs matter. Bad (and good) performance happen in both “efficient” and “inefficient” markets. Saying that “CAPM provides the first precise definition of risk and how it drives expected return…” is of little use when it is also precisely false. In addition, a large part of the book is spent on how returns over time have morphed from “alpha to beta”. For those of you who have not kept up with this battle of brains throughout the years, it has got to do with the following: After publishing the theories behind the EMH, other academics later produced studies that disproved this (in addition to what the real world also contributed). These anomalies to the EMH were later reclassified as “factors”, such as the small cap factor, value factor, momentum factor, quality factor (and counting), meaning that Fama & French is now up to a “five factor model” in their work. All this is of course in hindsight, after the fact. But the book treats them as predictable, stating that “once again alpha becomes beta”. So decades after Buffett, Schloss, Lynch and their lesser-known peers have produced superior results, they are removed by the stroke of a pen as “just exploiting a factor”. Where were the momentum-, value- and quality EMHers in 1981 when the size-factor was discovered (by an academic)? And the really interesting question is what alpha-returns of today will later be labeled beta? The equity-bond arbitrage?
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The Incredible Shrinking Alpha – Description
Alpha still exists! But that doesn’t mean it is easy to find, or even worth the pursuit.
Larry Swedroe, author of the bestselling series of The Only Guide investment books, and co-author Andrew Berkin bring you the quantitatively chilling tale of The Incredible Shrinking Alpha: And What You Can Do to Escape Its Clutches. As aficionados of classic science fiction, Swedroe and Berkin saw similarities between the monumental struggle of Scott Carey, novelist Richard Matheson’s Incredible Shrinking Man, and that of every individual investor trying to beat the market. Swedroe and Berkin explain in academic yet simple terms what is happening to the alpha for which so many investors yearn.
Offering compelling data from decades of academic research, Swedroe and Berkin present the hard truth as they know it — it’s not worth the time or effort spent battling to win those few extra cake crumbs. Instead, focus on the things you can control and discover what life has to offer beyond the quest for alpha.
The Incredible Shrinking Alpha – Review
From the Inside Flap
“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 the 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
“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, what’s 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 financial acumen.” – Francis Armstrong III, Author of The Informed Investor and Investment Strategies for the 21st Century
“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. The Incredible Shrinking Alpha: And What You Can Do to Escape Its Clutches could well end up saving you a lot of money — your money — and giving you a lot of free time.” – William Reichenstein, Investment Professor at Baylor University
“In The Incredible Shrinking Alpha: And What You Can Do to Escape Its Clutches, 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 I’ve read of this process yet. No polemics here, just a data centered exposition of the issues — the longtime trademark of Larry 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 ‘winner’s game.’ Read, study and apply their approach.” – Tobias Moskowitz, Fama Family Professor of Finance, University of Chicago Booth School of Business and Managing Director, AQR Capital Management
From the Back Cover
“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 investment results.” – Burton Malkiel, Author of A Random Walk Down Wall Street
The Incredible Shrinking Alpha: And What You Can Do to Escape Its Clutches by Larry E Swedroe and Andrew L Berkin