Stock Picking or Asset Allocation Alpha

My search is more focused on the damage an individual with limited expertise can do through buying and selling at the wrong times. My gut feeling is that a skilled manager's abilities become redundant if that work is undone in that way.

Swenson's comment on asset allocation being the primary driver of returns is not a unusual opinion. My understanding of what he says though is that both Allocation and finding people who can add alpha once that decision has been made is important. The only thing he has a big problem with is excessive aggressive attempts at market timing. Even though he does talk about taking advantage of opportunities.

Prof. Shiller makes a comment along those lines in the opening remarks of his next lecture in the series.

(This is a follow up to Colin's comment on the David Swenson lecture.)

People Make Mistakes

Posts have been sparse while I have focused on doing a fair amount of reading around the subject and fighting with data.

I have been reading Stocks for the Long Runby Jeremy Siegel, and Behavioural Finance: Insights into Irrational Minds and Marketsby James Montier.

I have also got about half way through Robert Shiller's course on academicearth.org. Siegel's is one of the set books.

Montier's book is one of the best sources I have come across so far, and he sites further academic papers for every point he makes.

Siegel's study is fascinating from the length of time it looks at. A lot of investors feel 5 years is long enough to make a decent assessment of the likely success of a strategy. Siegel looks at over 200 years of financial market returns! Admittedly the large majority of well kept data comes from a single market (the US), but he does look at other markets too. I will discuss some of the findings in further posts.

Shillers's course is fascinating (though academics and portfolio managers perhaps need to have a chat to Garr Reynolds about improving their communication skills). What I particularly enjoy is the contrasting views that seem to get air time. So far, it has had guest lectures from David Swenson, Carl Ichan and Andy Redleaf.

I have not yet found a study that looks at the pros and cons of using IRR as a measure for investor behaviour. The latest DALBAR study has just been released. It is interesting seeing the effects of a very significant 2008 year on this ongoing study. I am working through their process, and will no doubt have my own critique of their method in time, but I haven't come across any alternative benchmarking methods to look at.

David Swenson

Lecture 9 of Robert Shiller's course on Markets is a guest lecture by David Swenson who is the head of the investment committee of Yale.


I particularly enjoyed his responses to the questions at the end, although you couldn't actually hear the questions as there were no microphones in the audience.

The talk is about his approach to investing and he discusses asset allocation, market timing and security selection.

He also talks about what I am looking at on this blog looking at the difference between the time-weighted returns that funds publish and the dollar weighted returns that investors experience. He refers to a morningstar study that also documents not only individual but also institutional investors in their habit of buying high and selling low.

He talks about the '87 crash and how just before the crash a lot of institutions had historically high weightings to equity, and at the bottom increased their weightings to bonds.

He briefly looks at the allocation of the Yale fund and summarises his approach as having an equity orientated and diversified asset allocation, to avoid market timing and to focus your time and energy based on your skill levels and areas where it is possible to add value.

In choosing managers, a major factor is on the qualitative aspects. He looks for people of high integrity, with unimpeachable character who are smart and incredibly hard working. He wants managers who are obsessed with the markets and maniacally focused on beating the market and achieving superior returns rather than gathering assets.

An interesting talk, well worth the watch.