Can anyone realistically generate long-term alpha?

[Alan]

Is it the gambling portion of our psyche? The part that says we can "beat the system"?

Some years back a study was done comparing chickens to humans which pretty much sums up the human psyche in this area. It was the usual type of test where you have 2 feeding stations each with a light above it. If you happen to be standing on the plate below a light when it comes on you get a piece of food. The lights were set to come on randomly but weighted so that one light came on more often than the other.

The test was run many times with chickens and with human subjects. (The humans didn't know that they were being compared to chickens). Both human and chicken subjects were able to figure out which light came on most often. However, once a chicken figured out which odds were best it stayed put under the more fruitful light. Humans mostly would try to figure out the pattern and guess which light was going to come. In the vast majority of cases they fared much worse than the chickens.

It is just human nature to try and beat the odds. At age 75 my Dad he said he had finally "cracked" the lottery and was now the proud owner of a big rear projection TV. How much did you win I asked. Nothing, he replied, a few years ago I stopped buying lottery tickets and opened a Building Society account (a type of savings bank in England) and started putting my lottery money away.

 

[CyclingInvestor]

All I need to know about Cramer is that he recommended buying net stocks at the height of the dotcom boom. If I cared enough, I'd find a link to his famous column. I've never seen results from his hedge fund. Are they public (and audited)?

Probably not audited, but -

http://www.businessweek.com/magazine/content/05_44/b3957001.htm

"Cramer has been there and done that. He paid his dues in the '80s as a Goldman,
Sachs & Co. (GS ) broker, followed by 14 years at Cramer Berkowitz, his $450
million hedge fund, where he earned an average return of 24% a year after fees."

 

[ats5g]

fyi - in case anyone is interested in Cramer:

Jim Cramer vs. a Monkey

As for private equity, see:

Barry's links to private equity papers

Also, gbs provided some good papers on hedge funds in this conversation.

And, Eric Haas has links to some good papers on hedge funds and other subjects.

- Alec

 

[al_bundy]

this is pretty much useless since Cramer's real returns at his fund beat the SP500 and his show doesn't really count since it's only to give people investing ideas. and everyone knows that you can pick 30% winning stocks and still beat the SP500 if you manage your losers properly.

as for private equity, giving an average return is also pretty much useless since most times each transaction is a separate fund with different investors, etc. they use a similar legal mechanism like Enron with Special Purpose Vehicles except they do it legally. private equity is not like putting money into a Vanguard fund and leaving it for 20 years. Every time a new deal comes up you have the choice to invest or walk away. and every buyout is a separate transaction.

Stock market is putting money away and hoping someone pays you more for the stock than you paid. Private Equity is paying to buy out a company and getting real cash in the future for real assets that you own. and private equity extracts all kinds of dividends, fees, and interest on debt once they buy a company providing a nice cash flow higher than the yield of every stock index out there so even if they don't flip a company they have a nice cash flow for their investors and themselves they can use for future deals to keep their borrowing costs down

 

[dex]

Well - it took me about forty years of reading/study/hands on investment and a fairly expensive education via learn thru your mistakes to figure out:

1. Yes - it really is that simple.

2. The more you know, the greater danger you are - to yourself.

3. Hormones(especially male though not always) are incurable - unless you are dead.

Target Retirement - for retirement AND a few individual stocks for da hormones cause I don't golf and I haven't bought that kayak yet.

heh heh heh 8)

These are lessions for life in general - not just investing.
I will I knew them about 30 years ago.