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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

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 Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

. Twist” on the Stock/Bond Relationship

Hurricane Sandy, the SOMA Portfolio and QE


Efficient markets and the search for alpha

The Impact of Macro-economics on R-Squared Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

QE Contagion? Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

While Markets Are Reasonably Efficient, Investors are Not Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

While Markets Are Reasonably Efficient, Investors are Not Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

The Risk Premium? Twist” on the Stock/Bond Relationship

($SPX/SPLV)


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Anomalies Twist” on the Stock/Bond Relationship


Efficient markets and the search for alpha

Crisis… Twist” on the Stock/Bond Relationship

Risk & Opportunity



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.” mature on optimism, and die in euphoria.”

- 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 hell.”is king.”

-Desiderius Erasmus


Efficient markets and the search for alpha

The hell.”

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

it's different.’”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