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.)

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.