Efficient markets and the search for alpha
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“Efficient” Markets and the Search for Alpha. A discussion about the efficient market hypothesis, the financial crisis, and what they collectively tell us about the potential to create portfolio alpha

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Efficient markets and the search for alpha

“Efficient” Markets and the Search for Alpha

A discussion about the efficient market hypothesis, the financial crisis, and what they collectively tell us about the potential to create portfolio alpha

A discussion of the anomalies to the efficient market hypothesis and how you can use them to add value to client portfolios

A few useful quotes, Wall Street sayings and other tidbits that can make great talking points with clients


Efficient markets and the search for alpha

“Is there anyone in this room who actually believes that Fed policy or Washington politics or quantitative easing or any of that stuff has any real impact on the financial

markets?”


Efficient markets and the search for alpha

  • The Random Walk (no insight gained by fundamentals or previous prices)

  • Time in the market, not timing the market

  • Markets are too efficient to be timed

  • Market correlations, for example equities and GDP, are inexact

  • Riskier assets provide additional return via a risk premium

  • Markets largely move independently from macroeconomic factors

The Efficient Market Hypothesis


Efficient markets and the search for alpha

Time in the Market instead of Timing the Market


Efficient markets and the search for alpha

Sadly, the investor experience is decidedly NOT Logarithmic


Efficient markets and the search for alpha

The Random Walk and the Imperfect Correlation of Markets and Market Influences


Efficient markets and the search for alpha

The Impact of the 8/11/11 Introduction of “Operation Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

The stock/bond relationship-an inconsistent hedge


Efficient markets and the search for alpha

.

Hurricane Sandy, the SOMA Portfolio and QE


Efficient markets and the search for alpha

The Impact of Macro-economics on R-Squared


Efficient markets and the search for alpha

QE Contagion?


Efficient markets and the search for alpha

While Markets Are Reasonably Efficient, Investors are Not


Efficient markets and the search for alpha

While Markets Are Reasonably Efficient, Investors are Not


Efficient markets and the search for alpha

The Risk Premium?

($SPX/SPLV)


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Anomalies


Efficient markets and the search for alpha

Crisis…

Risk & Opportunity


Efficient markets and the search for alpha

“A gold mine is simply a hole in the ground surrounded by liars.”

-Mark Twain


Efficient markets and the search for alpha

“Bull markets are born in despair, grow on pessimism, mature on optimism, and die in euphoria.”

- Sir John Templeton


Efficient markets and the search for alpha

“Buy when there’s blood in the streets.”

- Baron Rothschild

“…but wait awhile if it is more than ankle deep… or if it is your own blood.”

-Unknown


Efficient markets and the search for alpha

Ask five economists and you'll get five different answers - six if one went to Harvard.

-Edgar R. FiedlerHe who lives by the crystal ball soon learns to eat ground glass. -Edgar R. Fiedler


Efficient markets and the search for alpha

“Capital markets without losses are like religion without hell.”

-Daniel Mitchell of the CATO Institute


Efficient markets and the search for alpha

“In the land of the blind, the one-eyed man is king.”

-Desiderius Erasmus


Efficient markets and the search for alpha

The

Lunching

Government

Economist


Efficient markets and the search for alpha

"Remember the First Law of Economics: For every economist, there is an equal and opposite economist--so for every bullish economist, there is a bearish one. The Second Law of Economics: They are both likely to be wrong." 

---William A. Sherden


Efficient markets and the search for alpha

"We have two classes of forecasters: Those who don't know--and those who don't know they don't know." 

---John Kenneth Galbraith


Efficient markets and the search for alpha

“The four most dangerous words in investing are 'This time it's different.’”

- Sir John Templeton


Efficient markets and the search for alpha

“History does not repeat itself, but it oftentimes rhymes”

-Mark Twain


Efficient markets and the search for alpha

“The markets can remain irrational longer than most investors can remain solvent.”

- John Maynard Keynes


Efficient markets and the search for alpha

“Only when the tide goes out do you discover who's been swimming naked.”

-Warren Buffett


Efficient markets and the search for alpha

“If you want to know what is happening in the market, ask the market”

-Japanese Proverb


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