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Alpha Theory Blog - News and Insights

October 01, 2018

8 Mistakes Money Managers Make

 

The 8 Mistakes Money Managers Make was an article I released almost five years ago. As much as I would love to report that its publication has cured all ills, the mistakes are still prevalent today. I believe its time for a second circulation of “the mistakes.”

 

The process to fix the mistakes is easy. The human behavior change is hard. I hope that this article will both show some easy to implement processes and start conversations about how to change your own behavior and that of your firm.

 

We’re here to help. We have solutions and services designed to help managers who want to improve and outpace their competition stuck in a “pre-Moneyball” mindset.

 

DOWNLOAD NOW

 

Watch Alpha Theory Lunch and Learn Webinar on 8 Mistakes Money Managers Make:

 

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September 08, 2018

What is Your 6th Best Idea?

 

What is your 6th best idea? If you run a portfolio, the answer should be at your fingertips. The issue is that for an overwhelming majority of the managers I’ve spoken with, it is not. Portfolio management, in its simplest form, is allocating more capital to the better ideas and less to the weaker ideas. If you can’t quickly determine your 6th best, then there are almost certainly mistakes. Mistakes come in the forms of great ideas with too little capital that leave potential return on the table and weak ideas with too much capital that add too much risk.

 

The first step, admitting there is a problem 😊 Step two, determine how you measure an ideas quality. It’ll end up being some mix of expected return, return hurdle, risk potential, conviction level, liquidity, etc. These are factors that every portfolio manager considers when sizing positions, but generally, each factors importance is weighed in a portfolio manager’s head. To be able to answer the question, what is my 6th best idea, these “rules” need to made explicit so that they can be externalized and run the same way against every asset in real time.

 

The new model approximates what you would have previously used your mental calculator to solve. The new model isn’t perfect but gives you an explicit answer you can debate. It will highlight inconsistencies like when your 6th best idea is your 16th largest. Then the question becomes, should we add to this position or is there a reason that the model doesn’t account for?

 

Ask yourself if you can quickly determine your 6th best idea today. If not, reflect on how your process would improve if you had an idea quality rank compared to its position size. If you want to see a system like this working in practice, let us know and we’ll show you a version with your own data.