“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   

“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?”

• 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 Hypothe

sis

Time in the

Market instead

of Timing

the Market

Sadly, the investor

experience is

decidedly NOT

Logarithmic

The Random Walk and

the Imperfect

Correlation of Markets and Market Influences

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

The stock/bon

d relationsh

ip-an inconsistent hedge

.

Hurricane Sandy, the SOMA Portfolio and QE

The Impact of Macro-economics on R-Squared

QE Contagion?

While Markets Are Reasonably Efficient,

Investors are Not

While Markets Are Reasonably Efficient,

Investors are Not

The Risk Premium

?

($SPX/SPLV)

Anomalies

Anomalies

Anomalies

Anomalies

Anomalies

Anomalies

Anomalies

Anomalies

Anomalies

Anomalies

Anomalies

Crisis…

Risk & Opportunity

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

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

- Sir John Templeton

“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

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

-Edgar R. Fiedler

He who lives by the crystal ball soon learns to eat ground glass.

-Edgar R. Fiedler

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

-Daniel Mitchell of the CATO Institute

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

-Desiderius Erasmus

The LunchingGovernme

nt Economist

"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

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

---John Kenneth Galbraith

“The four most

dangerous words in investing are 'This time it's different.’”

- Sir John Templeton

“History does not

repeat itself, but it oftentimes rhymes”

-Mark Twain

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

- John Maynard Keynes

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

-Warren Buffett

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