The Rarity of the Alpha Investor

According to the Times, an Alpha investor is someone with “the ability to beat an index fund without adding risk to a portfolio.” If you have a retirement account or an investment account, the standard advice has been to invest in low-cost index funds and not touch your money for many many years (which is what I practice). Billionaire Warren Buffett “has beaten the market by a wide margin over 49 years,” which means that he has the “alpha” quality, but the Times also reports that Buffett has, for the last four out of five years, “been doing worse than the typical, no-frills Standard & Poor’s 500-stock index fund — so much worse that it’s unlikely to be a matter of a string of bad luck.”

This comes to the relief of statisticians like Salil Mehta:

“It shows how amazingly difficult it is to keep beating the market, even for a master like Warren Buffett,” Mr. Mehta said in an interview. “And it suggests that just about everybody else should just use index funds and not even think about trying to beat the market.”

Buffett agrees with that: In his latest shareholder letter, he said it was all about index funds.

Photo: Wikimedia Commons



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