Try Blinkist to get the key ideas from 7,000+ bestselling nonfiction titles and podcasts. Listen or read in just 15 minutes.
Start your free trial
Blink 3 of 8 - The 5 AM Club
by Robin Sharma
Three Steps to Capturing Excess Returns in a Changing World
Alpha. If there’s one thing you share with your fellow investors, it’s probably a fascination with this alluring and elusive target. But, just like a beautiful mirage, alpha seems to disappear on closer inspection.
Before we examine this mystery in more detail, let’s take a moment to define alpha – a term that’s often misused. Alpha is the excess return of an investment relative to the benchmark index. In other words, alpha is basically a measurement of how well an investor is beating the market. By contrast, beta is the index return that’s achieved through passive ownership of securities in a specific market.
As an investor, you want alpha – not beta. However, that’s easier said than done.
The key message here is: Alpha is enticing – but it's also unreliable and easily manipulated.
Managers can easily distort alpha to suit their own ends. By picking their own index and choosing an easy-to-beat beta, they can present excess returns as alpha. But, as the saying goes, all that glitters is not gold. Close analysis often reveals that this so-called alpha is actually beta. This is why it’s so important for managers to use effective benchmarks before making the investment.
Alpha is frustratingly random and unreliable. It comes and goes. This trend is apparent in public markets, private equity, and hedge funds. The latter originally appeared to be an alpha success story, with hedge fund superstars like Warren Buffett and Barton Biggs making breathtaking returns.
But the data shows that since 2005, hedge fund alpha has been in decline. The author gives the example of one hedge fund that boasted historical returns of “100% pure alpha” – only to collapse just a few years later.
The erratic nature of alpha poses a particular problem for large asset owners, who may suddenly have to rethink their allocations of billions or trillions of dollars in capital. When you’re dealing with such a vast pool of capital, it’s a little like piloting a huge aircraft. It takes awhile to get up to speed, and you can’t suddenly change direction.
Individual investors also need to be cautious. As alternative investments like private equity and hedge funds become available for individuals, more people risk being misled by the alpha mirage.
It’s easy to fall for the hype or get confused by acronyms and buzzwords. In the next blink, we’ll take a closer look at the true nature of alpha – without the jargon.
Better than Alpha (2021) encourages investors to let go of their obsession with alpha – the amount an investment has returned compared to the market index. It explores what really drives returns, so you can build a successful portfolio and meet your investment goals instead of chasing rainbows.
It's highly addictive to get core insights on personally relevant topics without repetition or triviality. Added to that the apps ability to suggest kindred interests opens up a foundation of knowledge.
Great app. Good selection of book summaries you can read or listen to while commuting. Instead of scrolling through your social media news feed, this is a much better way to spend your spare time in my opinion.
Life changing. The concept of being able to grasp a book's main point in such a short time truly opens multiple opportunities to grow every area of your life at a faster rate.
Great app. Addicting. Perfect for wait times, morning coffee, evening before bed. Extremely well written, thorough, easy to use.
Try Blinkist to get the key ideas from 7,000+ bestselling nonfiction titles and podcasts. Listen or read in just 15 minutes.
Start your free trialBlink 3 of 8 - The 5 AM Club
by Robin Sharma