15 Ideas, Frameworks, and Lessons from 15 Years
Flirting with Models
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Lesson 3: Diversifying Beta vs. Expensive Alpha
Diversifying cheap beta is as valuable as diversifying expensive alpha. A portfolio doesn't care if an investment is alpha or beta. Introducing a novel source of diversifying beta is cheaper and carries a higher degree of confidence in its risk premium compared to accessing alpha. Thoughtfully introducing bonds to a stock portfolio can do more for long-term returns with higher confidence than trying to pick better stocks. Beta drives the majority of returns over the long run, so it is more fruitful to exhaust sources of beta before searching for novel sources of alpha.
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