Earning Alpha

What is Alpha?

Have you ever wondered whether you earned enough for the risk taken? In the professional investor world, we use Alpha to measure extra return for the risk; and it is very valuable.

Not All Returns Are Earned Equally

We are all risk managers throughout our lives. Doubt it? Consider two people crossing the middle of a very busy street. One has a life-threatening injury and urgently needs to reach the hospital on the other side while the other wants to arrive early for a meeting. Once both successfully cross, they are rewarded; but was the risk worth it in each case?

We can understand why the injured pedestrian crossed – impending death from injury makes getting hit by a car a lesser concern. The pedestrian trying to arrive early also succeeded, but how many of us would take the safer route if we understood the risk?

The investment data over many years suggests too many retail investors hurtle themselves across busy streets with resulting underperformance over time. The following table lays out average retail investor returns as compared to the most popular stock market indexes from 2013 to 2022:

Source: JP Morgan, S&P Dow Jones Indices

While fees and expenses account for roughly 2% of the average annual 23-24% shortfall, most is a failure to understand the risk for the return. That means the average retail investor earned zero Alpha.

The Alpha Hunt

Hunting Alpha is hard – you need discipline and experience to design portfolios to trap these illusive benefits.

In today’s investment landscape, Wall St. presents an ETF world where retail investors almost systemically underperform over time. For many, that slight underperformance by ETFs for the S&P 500 Index and the Equal Weight version are much better choices than missing by an average 23% every year.

But that doesn’t earn any Alpha. To earn Alpha, we have to design for it.

LUL Alpha Production

We capture Alpha through lower risk portfolios that matched or even beat the above indexes over the 3.25 years we’ve offered our service. In the following table, you can see in the second row that about 43% of our average annual profit comes from Alpha:

The Life UnLocked Approach

We start with deep respect for the capital entrusted to us. We know from experience the money we manage came from one or more series of important events and job one is preserving it over time.

Job two is taking enough risk not to be left behind by the economy. Just placing all the capital in a CD, savings account, money market account or government bonds is simply a slow way to lose ground over time. Like it or not, we must take more risk just to keep up.

The LUL proprietary portfolio, unlike ETFs failing to earn Alpha, happily sacrifices the most volatile stocks for something better-balanced, steadier, and flexible enough for client to access funds within about 48 business hours.

Our process is easy to understand, too – we pick the best sectors based on the two most likely outcomes for the economy over the next year or two. From there, we filter and research companies who fit our analytic requirements for investment. Of course, the trick to getting it right is proper judgment at every step.

What It Means for Us

Our experience and judgment distinguish us from the crowd – we’ve been analyzing businesses and their securities for many decades. We’ve learned valuable lessons by working in those industries and through years researching them as an investor. Our string of earned Alpha trophies is no easy feat. Can we design and manage one for you?