! Is Outperforming the Market Alpha or Beta?
Larry Swedroe is director of research and principal of Buckingham and the BAM Alliance and co-author of "Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today" (Buckingham, 2016) .
Andrew Berkin Ph.D., is director of research for Bridgeway Capital Management and co-author of "The Incredible Shrinking Alpha" (BAM Alliance Press, 2015).


Leo Belman from Md posted over 2 years ago:

Terminology changes with the decades but the dynamics of profit and growth become evident when companies create wide moats for themselves and have the foresight to diversify during periods of high cash availability. Understanding your market and when to act still takes that special sense of competitive business genius.

Bruce Sansom from Alberta posted over 2 years ago:

I am curious about the notion that the various indices represent an "efficient market". I have been arguing for 50 years that a cap weighted index leans against the security diversification seeks. I am not a math genius but it seems illogical to accept a cap weighted index as a good benchmark.
I have no point to make other than as a portfolio manager, I try to deliver the objectives expected in the investment Policy Statement.
Too many changes are motivated by performance comparisons which can be misleading.

Matthew Foley from CA posted over 2 years ago:

Extraordinary article! I've had a persistent feeling that active management is passe, and here's a sound theoretical basis for that conclusion.

Matthew Foley from CA posted over 2 years ago:

How does one identify an appropriately high beta bond ETF or other vehicle? Could you identify some? Thanks.

Charles Rotblut from IL posted over 2 years ago:


Our annual ETF guide, which will be updated in August, shows which ETFs are more or less risky than their category peers.


Andrew Atkinson from CO posted over 2 years ago:

I also think equally weighted indices are better than cap weighted indices, but the expense ratios are turning me off of the equally weighted alternatives. I am not sure an equally weighted strategy is 30-35 basis points better over time.

Samir Desai from TX posted over 2 years ago:

This article states "Beta, defined as the average return of the total U.S. stock market minus the return of one-month Treasury bills: 8.4%."
This is incorrect definition of beta.
This article is grossly misleading. Active managers choose a benchmark from a certain risk-return perspective. When they deliver superior return for the same level of risk as the benchmark, they deserve to be recognized and applauded.
When I was in school, 70% of students were poor or mediocre performers. Does that mean "it is not possible to be better than the 70%?"
The entire point of active management is to perform better than that mediocre bunch while exposing myself to the same or lower level of risk. Can it be done? Yes. Many, many managers are doing this for years.

Phillip Devrou from LA posted over 2 years ago:

Charles, you responded, "Our annual ETF guide, which will be updated in August, shows which ETFs are more or less risky than their category peers."

What is not clear to me is what investments, ETFs, will give the mix to "play the winner’s game. Focus on deciding how much exposure you want to each of the factors we have discussed, and then choose the vehicles that best allow you to build a globally diversified portfolio that implements your strategy in the most efficient manner."

Perhaps a follow up article on implementing the advise is required for remedial investors like myself.

Also, will there be a Q-factor stock screen?

Charles Rotblut from IL posted over 2 years ago:


We have three asset allocation models, which you may find to be of use. Keep in mind that asset allocation is a very personal decision and needs to be tailored for your personal financial situation and tolerance for risk (particularly your ability to tolerate stock market drops of 10% or more).

As far as the Q-factor stock screen, are you referring to Tobin's Q?


Phillip Devrou from LA posted over 2 years ago:

Charles, I must not be understanding the article correctly. I thought it was sating that momentum, size, and value along with beta is what drives alpha. I am sure how the three asset allocation models address the value and especially momentum part of the equation.

The article did spur me to review the screens already offered and momentum does generically appear to offer higher returns, but often with higher risk - thus corraborating the researchers conclusions.

New screen: I was refering to "Kewei Hou, Chen Xue and Lu Zhang, authors of the September 2012 study, “Digesting Anomalies: An Investment Approach,” proposed a new four-factor model (market beta, size, investment and profitability) that went a long way to explaining many of the anomalies. An updated version has been accepted for publication in the Review of Financial Studies. ... this new four-factor model, which the authors named the q-factor model," in the article.

Thank you for your patience and willingness to educate.

Warren Dagenbach from PA posted over 2 years ago:

I found this article very interesting and would like to see some sample mutual fund portfolio's build using the four-factor model.

Is there any additional information showing actual returns of portfolios build using some of these techniques?

John Wilson from Alberta, Canada posted about 1 year ago:

I disagree with this article. Here are a few reasons why:

1. Technology is the best thing that has happened for the retail investor. The bid/ask spreads are narrower and you don't have to call your broker to place an order. Commissions have come down...a true win/win.

2. Pool of victims? The market is not a zero sum game as many people think. Just sell a Put at the money on the SPY every month and you'll beat the market. Why? Actual volatility is less than implied volatility over time. Thus, it's not a zero sum game. Exploitation is irrelevant.

3. I trade actively. Passive investing does well, but if you want to do better just sell premium (i.e. sell puts). That's all the alpha you need. Since no one knows anything, increase your odds of success by selling options. It really is that simple.

I like the magazine, but I just don't understand why it doesn't address these above issues.

Thanks, John

John Duguid from NJ posted about 1 year ago:

An Inspection of a paper entitled "Does Complexity Imply Value: AAII Value Strategies from 1963 to 2013" by Wesley Gray, et. al, they look at 13 AAII value strategies, along with a simple EBITDA/TEV strategy over a long period of time. Interestingly, an inspection of tables 3 and 4 of this paper suggest the following: half the screens (including the simple EBITDA/TEV screen) had a superior alpha and 5 out of 14 had a greater CAGR relative to the market (SP500 EW) during the entire observation period and from 1997 to 2013, 9 out of 14 screens had a superior alpha and half had a greater CAGR, relative to SP500 EW. This study seems to have corrected for SMB, HML and MOM. Incidentally, Piotroski's FScore and simple EBITDA/TEV had best long term results and the Graham Defensive, Non-Utility, Joel Greenblatt Magic Formula and EBITDA/TEV have significantly outperformed SP500 EW over the most recent 16-year period studied. Seems to be alpha even when many of the beta-factor relationships are accounted for. Alpha seems to persist and it may obtainable from a simple EBITDA/TEV screen, calling into question the value of complexity. One final note...it seems that if you do scrub the data well enough, alpha can be obtained from a diversified portfolio. While not a rigorous academic study, David Trainer has shown about a 4% outperformance, relative to market benchmarks by simply doing a thorough scrubbing of accounting data into a more economically feasible format in a consistent automated fashion. This outperformance goes back over 16 years...and you could layer on low cost puts (in Spitznagel-like fashion) to protect your downside and drive further outperformance. Seems to me plenty of anomaly to be had out there before calling checkmate on active investing.

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