Jack: Ben Hunt of Epsilon Theory started an interesting Twitter debate recently about whether alpha is achievable in the current investing world. Now that standard exposure to factors like value and momentum is considered beta, the bar to cross for active managers to produce alpha is very high. Ben’s overall point was that he believes that alpha is not possible without non public information. And since pretty much all legal information these days is public and gets disseminated quickly, it doesn’t paint an optimistic picture for the ability of managers to generate alpha going forward. Where do you come down on this debate? Do you think it is still possible for managers to generate alpha without material non-public information?
Michael:
I absolutely believe that alpha is a real thing. But I also believe that very few people obtain it and people spend an inordinate amount of time, energy, and money searching for it. Most investors would be best served focusing on capturing beta.
Jack: You participated in a recent article by Brendan Mullooly where he asked a group of successful investors what their biggest behavioral bias was. Overconfidence seemed to be the most popular choice, but the answers covered a wide spectrum of biases. When I was reading the article, I thought it would be interesting to contrast the answers the experts gave with the types of biases that have the biggest negative impact on individual investors. Which biases do you think have the biggest effect on individual investors and how do you think that contrasts with the answers given by the pros?
Michael:
I don’t think there are big differences in behavioral biases when it comes to people in finance and people outside of it. All humans are human.
Jack: The issue of home country bias has been the subject of a lot of debate recently. On one hand, finance theory would support significant exposure to other countries given the diversification benefit it provides, and people like Meb Faber have argued that US investors should have much more foreign exposure than they do now. On the other, your colleague at Ritholtz Josh Brown and others have argued that there are many reasons that a country like the US should trade at a premium, which would support having more home country exposure for a US investor than an optimization model might dictate. There also could be a behavioral component here, with investors potentially being more likely to stick with a strategy that focuses on investing in a country that they know. What are your thoughts on the balance between global diversification and home country bias?
Michael:
I am a big believer in global diversification. I understand all the reasons why the U.S. should trade at a premium, but I also believe that you shouldn’t put all your eggs in one basket. The outperformance and underperformance of U.S. stocks relative to the rest of the world has ebbed and flowed in the past and I do believe that U.S. outperformance is not a permanent feature of the markets. Again I understand why we have done so much better over the last decade, but that’s not a bet that I would want to make in perpetuity.
Jack: Thank you again for taking the time to talk to us today. If investors want to find out more about you and Ritholtz Wealth Management, where are the best places to go?
Michael:
My blog is Michaelbatnick.com and my book is Big Mistakes: The Best Investors and Their Worst Investments.
I’m also on Twitter @michaelbatnick
They can listen to Animal Spirits
Read my book Big Mistakes