You’ve got to guess at worst cases: No model will tell you that. My rule of thumb is double the worst that you have ever seen — Clifford Asness, AQR Capital
This article is dedicated to a legend in the world of investing — John C. Bogle. John’s work help put a fresh pair of eyes on millions of people around the world as they looked at the markets and their investments. John was the founder of Vanguard — a firm that was based on a truism. A truism that — over the longer term, market indices will outperform active fund managers. Today, Vanguard has $5.1 trillion of Assets Under Management (AUM)- that’s more than the GDP of Germany, the U.K. or France (in nominal terms). John had his own unique way of deciphering a simple truth about markets in the long run. We also seek many different types of truths. Of course, all of us are ultimately chasing eternal truths-truths as old as time itself. This article outlines the pursuit of truth through the lens of the various investment strategies adopted by investors. It ends by explaining the ultimate alpha we all chase in our own unique and varied ways.
A strategy is a plan of action designed to achieve a long-term or overall aim. In business, a strategy is a way to gain an advantage over the competition using differentiation. In a simplistic way, there are two sources of differentiation — price and value. A strategy is a means to an end. In investment, a strategy allows you to generate ‘alpha’ — a return in excess of the market return (as measured by the market indices).
As a teenager, I was told a story of a man who had nothing but his clothes and torn sandals on his feet before he came to gaze upon the Mumbai stock exchange. He was not educated and had nothing to lose. This made him driven, dangerous and extremely ambitious. He went on to make millions sometimes using less than scrupulous means. At the end, the authorities caught up with him. I will not take names but this story taught me a valuable lesson — the means is as important as the end. There is no harm in being extremely ambitious and wanting the world…