By
Borsgade
In his latest letter, Howard Marks of Oaktree discusses his view on the ability to beat the market – also known as alpha. There are several ways to deliver a good result and Marks discusses how that has changed for him over the years.
In their original approach, the approach was “If we avoid the losers, the winners will take care of themselves. ” Marks has had to adjust this a bit over the years, as there are returns beyond the market by finding the Right companies to invest in: “When you aspire to returns well above those available on bonds, it’s not enough to avoid losers; you actually have to find (or create) winners from time to time.“
If alpha is the ability to earn return without taking fully commensurate risk, investors possessing it can do so by either reducing risk while giving up less return or by increasing potential return with a less-than-commensurate increase in risk. In other words, skill can enable some investors to outperform by emphasizing aggressiveness and some by emphasizing defensiveness. […] Almost no investors possess both forms of alpha, and most possess neither. Investors who lack alpha shouldn’t expect to be able to produce either version of asymmetry – that is, to be able to generate superior risk-adjusted returns. However, most believe they do have it.
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