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Alpha Theory Blog - News and Insights

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4 posts from February 2009

February 27, 2009

Michael Lewis: Moneyball - Basketball Style (Why investors should heed the lessons of probability)

As a North Carolina Tarheels basketball fan, it pains me to say, “I like Shane Battier.”  After reading another great article by Michael Lewis in the New York Times titled “The No Stats All-Star” I recognize his skills of making his team better and it helps explains some of the losses he handed my beloved Heels during his reign at Dook.  However the greatest take away from the article, just like Michael Lewis renowned book Moneyball, is you better get smart if you don’t want to get left behind. 

Continue reading "Michael Lewis: Moneyball - Basketball Style (Why investors should heed the lessons of probability)" »

February 20, 2009

Traditional Risk Management - Where does it fit in the future of Portfolio Management?

The chorus of pundits critical of VaR, traditional risk models, and Modern Portfolio Theory has grown louder over the years with a crescendo in the past few months with the public defeats of these theories in failing to defend firms against over-exposure in RMBS, CMBS, CDS and numerous other shaky acronyms.  Although I agree that stat-based risk management has its flaws, it is not useless, and should be used in concert with a more fundamental approach to risk and portfolio management.  Joe Nocera of the New York Times does a good job of describing the frailty of VaR, its overuse as the defacto risk management standard, and how smart firms use it as one of the myriad tools in their toolkit.

New York Times Risk Management Article

February 11, 2009

BizRadio Interview with Dan Frishberg and Dr. Art Laffer

BizRadio Network

I was recently interviewed by Dan "The Money Man" Frishberg and Dr. Art Laffer on BizRadio.com.  We discussed some of the mistakes that are most common amongst investors including poor position sizing, under appreciation of downside risk, over confidence in asset selection, and inefficient use of ETFs.  The conclusion of our discussion is that many of the woes of investors could be solved by simply calculating a risk-adjusted return for every asset in your portfolio.

Radio icon  Listen to interview:  

February 1, 2009

Bill Ackman-Style Investing: Know that you can't know the unknowable

The 3Q08 Pershing Square letter, written by portfolio manager Bill Ackman, is a great example of the salient decision making that good fundamental managers employ.  They strive to eliminate unanswerable questions as not to distract the firm from their ultimate goal; profiting from fundamental research.

“We spend little time trying to outguess market prognosticators about the short-term future of the markets or the economy for the purpose of deciding whether or not to invest.  Since we believe that short-term market and economic prognostication is largely a fool’s errand, we invest according to a strategy that makes the need to rely on short-term market or economic assessments largely irrelevant.” – Bill Ackman, Pershing Square


Market and economic direction are multi-variable equations with thousands of inputs.  You can find two Nobel Laureate economist with well-defended theses for divergent directions of the US economy.  If they cannot figure it out, why should you try?  Mental capacity is a precious commodity and should be focused on reasonable prognostication, not on knowing the unknowable.


I also found it interesting that Bill Ackman employs risk-adjusted return (expected return) to focus on the important elements of investment decision making:  potential profit, potential loss and the probability of each (http://changealley.blogspot.com/2009/01/bill-ackmans-great-expectations.html). 

Firms that utilize risk-adjusted return to manage research and determine position size dramatically outperform firms that manage the portfolio through instinct and mental calculation.