Alpha, Beta, Gamma, Oh My.
This play on the Wizard of Oz came up recently in a conversation with a fellow investment professional about the importance of investor education. In the person’s biography, I noticed that they are fluent in Greek and I couldn’t help but mention the phrase:
“It’s All Greek to Me.”
As we joked, we agreed that our industry can often speak a language that many don’t understand.
After we chatted, I couldn’t place my finger on the origin of this phrase. My old English teachers would not be pleased that I couldn’t remember, but it comes from Shakespeare’s Julius Caesar.
I’m far from a translator of the old English used by Shakespeare, but I think I’ve gotten the following from Act I about right, especially as it connects to my exchange with the advisor I mentioned.
Did the speaker say anything of note?
I don’t know. I didn’t follow it.
It was all Greek to me.
Others in the room, however, smiled at one another and shook their heads.
Does this sound familiar?
If you are in the investment business you’ve surely been in meetings like this.
Let’s just admit it.
Even though we throw around Greek like we grew up in Athens, many in the business don’t always fully track what is being discussed.
In presentations, all tend to smile and shake their heads when terms like Alpha, Beta, Gamma, and Delta hedges are discussed, but do we really understand their complete definitions and how they fit into the discussion about various investment strategies and allocations?
And, even when we do, do we sometimes apply them in ways that we shouldn’t?
Joachim Klement and I discussed this in a piece we called, Stats on Statistics.
In case you think I’m being too hard on our profession, I’m not alone in this.
The following is a quote from a 2001 Howard Marks memo titled, What’s It All About, Alpha?.
“Everyone talks about alpha… and beta, risk and return, and efficiency and inefficiency. But I believe few people use them to mean the same thing, or correctly.”
I get it, though, and know how all the Alphas in our business love to say that word…
No offense meant to anyone. Talk about money and investing is emotional and we all get caught up in the excitement of it from time to time.
In addition, outliers exist and we should strive to add value by keeping an eye out for them.
I just don’t think that providing advice to investors is all about performance or standard deviation relative to an index or peer group.
I’m also not an outlier in this view.
“The world has a relative performance orientation. If you beat the market or you beat your peers, you will gather assets, even if you lose money doing it.”
My conversation with the Greek speaking advisor sparked this post, but so did a talk that I had with Dasarte Yarnway for an Altruist Human Advisor video.
During our chat, we touched on our shared belief that human to human conversations about true goals and objectives are what adds the most value in our business. From these discussions, we can then help investors (individuals and institutions) establish plans and, importantly, stick to them.
Plan > Products
If we put plans and a process around them first, and so-called Alpha products second, both my experience and research shows that investors achieve higher returns (again – individuals and institutions alike).
In a 2015 piece that I originally wrote for Trust & Estates magazine, Absolute Value and Transparency, I noted the Klarman quote above and this:
“I think the aggressive pursuit of alpha at the potential expense of greater absolute, goal oriented results should be more openly discussed.
Rather than simply selling relative performance and relative risk metrics (Sharpe ratio comparisons, etc.), let’s spend more time discussing both sides of topics, listening to what clients want to achieve, and implementing strategies that increase comfort and peace of mind.
I think it would increase trust in our industry as a whole and help us form more lasting partnerships with clients.”
As time has passed and we’ve experienced more human and market emotions, I have come to believe this even more.
It’s not all about alpha.
Rather than speaking so much Greek, how about using plain language, and spending more time on translating the complex into simple terms?
How about being mindful that investing should not be a competition with others, but the means to helping investors reach their specific goals?
If we do, I think we will add more value to both our profession and to clients.