Alpha - Skill and Luck
Results Reflect Your Skill and the Game You Are Playing
The key to generating excess returns is to not only be skillful but to find attractive “games”—situations where
you can see where your excess returns are likely to come from.diversity breakdowns, institutions versus individuals, and trading with investors who are
buying for non-fundamental reasons
How Dispersion Creates the Opportunity to Express Skill
The first point to make is that all the skill in the world is useless if there is no opportunity.
Second, the cost to play may be too high
Finally, skill is obscured if the opportunity does not offer differentiated payoffs - the paradox of skill
Finally, we offer a simple, four-step diagnostic process to allow a portfolio manager to disentangle performance.
These tools are meant to encourage self-examination and to reveal areas where an investment process can
improve.
First, it is crucial to think about your source of edge and to align your organization’s process to serve that end. Second, a big part of winning is finding a game that allows you to show your skill.