How much alpha do you really need to generate?

[Cam019]

I was listening to an Equity Mates Investing Podcast episode with Meb Faber yesterday afternoon which lead me to an article of his, which you can find here, that hit me like a tonne of bricks. The basic premise was this - Are you generating enough alpha p.a. to justify the amount of time you are spending each week either doing investment research, trading or studying the markets?

Below is the table from the article that shows, generally speaking, how much alpha you need to be generating p.a. dependent on your salary, portfolio value, and the amount of hours you spend on research or trading per week. Obviously there is an element of crudeness here, so I don't want to hear your complaints about the inaccuracy of the values used within the table, adjust them to suit your own personal circumstances if need be.

This was an eye opener for me because time is only commodity that we can never get back. I also have quite a few carry forward losses from the last three financial years which proves even with all the study I have been doing; I have not been outperforming the index.

For me though, there is something even more startling. I am in the lowest salary bracket and I would have never had more than $4,000 to allocate to the markets at any one time. Substituting that in, I would need to generate 250% p.a. in alpha to justify the time I have been spending either researching stocks, trading, etc. 250%!!

Personally, I am moving away from trying to stock pick or trade, to something like VDHG and reclaiming my 416 hours per year.

Food for thought.

 

[InsvestoBoy]

I was listening to an Equity Mates Investing Podcast episode with Meb Faber yesterday afternoon which lead me to an article of his, which you can find here, that hit me like a tonne of bricks. The basic premise was this - Are you generating enough alpha p.a. to justify the amount of time you are spending each week either doing investment research, trading or studying the markets?

Below is the table from the article that shows, generally speaking, how much alpha you need to be generating p.a. dependent on your salary, portfolio value, and the amount of hours you spend on research or trading per week. Obviously there is an element of crudeness here, so I don't want to hear your complaints about the inaccuracy of the values used within the table, adjust them to suit your own personal circumstances if need be.

This was an eye opener for me because time is only commodity that we can never get back. I also have quite a few carry forward losses from the last three financial years which proves even with all the study I have been doing; I have not been outperforming the index.

For me though, there is something even more startling. I am in the lowest salary bracket and I would have never had more than $4,000 to allocate to the markets at any one time. Substituting that in, I would need to generate 250% p.a. in alpha to justify the time I have been spending either researching stocks, trading, etc. 250%!!

Personally, I am moving away from trying to stock pick or trade, to something like VDHG and reclaiming my 416 hours per year.

Food for thought.

View attachment 102538

I like Meb Faber, but is this right?

The biggest assumption is that the value of your time is constant and the value of extra money is only defined by value of your time?

Forget the markets for a second.

Let's say both you and your friend make $50,000 a year working a 40 hour a week job, so you both earn ~$24/hr gross.

Between rent and bills and food and whatever basic expenses, you are left with no surplus cash to save.

You decide to take on an extra job working Friday and Saturday night at the local pub. Between wages and tips, you only earn $18/hr doing this, and it's only for 8 extra hours a week. Your friend is a bit lazier and decides to do nothing.

At the end of a year, you have saved ~$7500. After 5 years, you will have saved ~$37,500. Let's say every year you invest that money conservatively and manage to earn 3% nominal returns a year for doing so.

At this point, your friend will have nothing.

You will have:


According to the above chart, it wasn't worth it, because you didn't generate enough "returns", to "break even".

is that right?

Was it worth it, to work those extra 8 hours a week, or not?

 

[Value Collector]

I like Meb Faber, but is this right?

The biggest assumption is that the value of your time is constant and the value of extra money is only defined by value of your time?

Forget the markets for a second.

Let's say both you and your friend make $50,000 a year working a 40 hour a week job, so you both earn ~$24/hr gross.

Between rent and bills and food and whatever basic expenses, you are left with no surplus cash to save.

You decide to take on an extra job working Friday and Saturday night at the local pub. Between wages and tips, you only earn $18/hr doing this, and it's only for 8 extra hours a week. Your friend is a bit lazier and decides to do nothing.

At the end of a year, you have saved ~$7500. After 5 years, you will have saved ~$37,500. Let's say every year you invest that money conservatively and manage to earn 3% nominal returns a year for doing so.

At this point, your friend will have nothing.

You will have:
View attachment 103081

According to the above chart, it wasn't worth it, because you didn't generate enough "returns", to "break even".

is that right?

Was it worth it, to work those extra 8 hours a week, or not?

I think you are missing his point a bit.

we can apply the actual point to your example, but asking would it be worth the persons time to spend an addition 5 hours a week working on his investments actively, or should he just be happy with the 3% we can make passively.

It all comes down to his actual results, if he invests 5 hours a week and in return gets his money compounding at 10% instead of the passive 3% you mention, then yes it is a good use of his time.

However, if he invests 5 hours of his time a week to active investing but still only earns 3% (or worse 1%), then it's true he is wasting his time, he would be better to work an extra 5 hours at the $24/hour you mention and add that to his capital earning the passive 3%.

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It also comes down to the fun you have while investing, for me I really love the process, But if I found that I was consistently under performing, I would put 90% of my funds in indexes and play with 10% for the fun of it.

But, if you find it a chore and hate it, then you really need to be beating the index or you may as well be watching movies rather than working in a job you hate where you are gaining nothing additional for your efforts.