Christopher Schelling – Better than Alpha: Summary with Audio

Book Info

• Book name: Better than Alpha: 3 Steps to Capturing Excess Returns in a Changing World
• Author: Christopher Schelling
• Genre: Non-fiction: Business & Economics
• Published Year: 2023

Audio Summary

Synopsis

In “Better than Alpha,” Christopher Schelling challenges the investment world’s obsession with alpha, arguing that it’s often unreliable and easily manipulated. Drawing from years of institutional investing experience, Schelling presents a smarter strategy for meeting investment goals. He advocates for radically rethinking success metrics and offers practical advice on decision-making, due diligence, and governance to achieve better returns in a rapidly changing financial landscape.

Key Takeaways

• Alpha is often unreliable and easily manipulated; investors should focus on total net returns instead.
• True alpha is declining due to the explosion of market factors and data availability.
• Effective decision-making requires balancing quick intuitive thinking (System 1) with slower analytical thinking (System 2).
• The 5P framework (Performance, People, Philosophy, Process, Portfolio) can improve due diligence and investment outcomes.
• Strong governance and experienced, charismatic leadership are crucial for investment success.

My Summary

Rethinking Alpha: A New Perspective on Investment Success

As a longtime investor and financial blogger, I’ve seen my fair share of investment strategies come and go. When I picked up Christopher Schelling’s “Better than Alpha,” I was intrigued by its promise to challenge one of the most deeply ingrained concepts in the investment world. After diving into this thought-provoking book, I can confidently say that Schelling delivers on that promise, offering a fresh and pragmatic approach to achieving investment success.

The Alpha Mirage: Unmasking a Persistent Myth

Schelling begins by dismantling the widespread obsession with alpha in the investment community. As someone who’s chased alpha myself in the past, I found his analysis both enlightening and somewhat uncomfortable. He argues convincingly that alpha is often unreliable, easily manipulated, and frequently misunderstood.

One of the most eye-opening sections for me was Schelling’s breakdown of different types of alpha:

• True alpha: Excess returns generated solely through security selection
• Manufactured alpha: Value creation through active changes
• Transitional alpha: Temporary gains from holding assets until prices normalize

This nuanced view helped me understand why so many investors, myself included, have struggled to consistently achieve alpha. Schelling’s explanation of how true alpha is declining due to the explosion of market factors and data availability resonated with my own observations of the changing investment landscape.

The Cognitive Biases Trap: Why Our Brains Betray Us

As I read through Schelling’s exploration of cognitive biases in investing, I couldn’t help but reflect on my own decision-making processes. His discussion of the inherent heuristic – our tendency to identify patterns and create explanatory narratives – struck a particular chord. I realized how often I’ve fallen into this trap, especially when evaluating past investment performance.

Schelling’s advice to combat these biases through continuous learning is something I plan to take to heart. While I may not be able to match Warren Buffett’s eight hours of daily reading, I’m committed to dedicating more time to expanding my financial knowledge and challenging my assumptions.

The Power of Thoughtful Decision-Making

One of the most practical aspects of “Better than Alpha” is Schelling’s guidance on decision-making. His explanation of System 1 (quick, intuitive thinking) and System 2 (slower, analytical thinking) based on Daniel Kahneman’s work provided a valuable framework for understanding how we approach investment decisions.

As someone who often feels overwhelmed by the sheer number of decisions required in investing, I found Schelling’s advice to reserve System 2 thinking for big, impactful decisions particularly helpful. His suggestion to focus on policy setting and asset allocation as key areas for deep analysis has already influenced how I structure my investment process.

The 5P Framework: A New Approach to Due Diligence

Schelling’s 5P framework for due diligence – Performance, People, Philosophy, Process, and Portfolio – offers a comprehensive and practical approach to evaluating investment opportunities. As I read through his explanations of each component, I realized how often I’ve overlooked crucial aspects in my own due diligence process.

For example, his emphasis on evaluating the investment team’s work philosophy and ensuring a consistent, predetermined process are areas where I know I can improve. I’m excited to implement this framework in my future investment analyses and believe it will lead to more thorough and effective evaluations.

The Crucial Role of Governance and Leadership

One aspect of investment success that I hadn’t given enough thought to before reading “Better than Alpha” was the importance of governance and leadership. Schelling’s discussion of the Dallas Fire and Police Pension case study was a stark reminder of how poor governance can lead to disastrous outcomes.

His advice to prioritize experienced and charismatic leaders in investment organizations is something I’ll be keeping in mind, not just for evaluating potential investments but also for my own personal development as an investor and financial writer.

Beyond Alpha: A New Path to Investment Success

As I reached the conclusion of “Better than Alpha,” I found myself reevaluating many of my long-held beliefs about investing. Schelling’s core message – that chasing alpha may be futile and that we should instead focus on proven strategies to shift the odds in our favor – is both liberating and challenging.

His emphasis on total net returns rather than beating benchmarks is a perspective shift that I believe many investors, including myself, would benefit from adopting. The example of the State of Wisconsin Investment Board’s success through smart governance and sustainable processes provides an inspiring model for what’s possible when we move beyond the alpha obsession.

Applying the Lessons: My Takeaways

After finishing “Better than Alpha,” I’ve been reflecting on how to apply its lessons to my own investment approach and financial writing. Here are some key areas I plan to focus on:

• Reevaluating my investment goals and success metrics, focusing more on total net returns rather than beating specific benchmarks
• Implementing the 5P framework in my due diligence process for a more comprehensive evaluation of investment opportunities
• Dedicating more time to deep, analytical thinking (System 2) for major investment decisions while streamlining my approach to routine choices
• Paying closer attention to governance and leadership quality when evaluating investment managers or organizations
• Continuing to educate myself and challenge my assumptions about investing, particularly regarding the nature of alpha and excess returns

Final Thoughts: A Call for a More Intelligent Approach to Investing

Christopher Schelling’s “Better than Alpha” is a thought-provoking and practical guide that challenges conventional wisdom in the investment world. While some readers may find it difficult to let go of the allure of alpha, I believe the book offers a more sustainable and realistic path to investment success.

As we navigate an increasingly complex and data-driven financial landscape, Schelling’s call for a more intelligent, scientific approach to investing resonates strongly. By focusing on improving decision-making processes, following solid frameworks, and establishing strong governance, investors can indeed create their own “gold” – consistent, reliable returns that meet their objectives.

I encourage my fellow investors and financial enthusiasts to read “Better than Alpha” with an open mind. Whether you’re a seasoned professional or a curious individual investor, Schelling’s insights offer valuable food for thought and practical strategies for improving your investment outcomes. Let’s move beyond the alpha myth and embrace a more nuanced, effective approach to creating value in our portfolios.