In this review of Finding Alpha: The Search for Alpha When Risk and Return Break Down by Eric Falkenstein, David Merkel summarises with words I’ve often penned.

What this all says to me is that investors are too hopeful. They look for the big wins and ignore smaller ways to make extra money. They swing for the fences and get an “out,” rather than blooping singles with some regularity. I like blooping singles with regularity.

via Merkel on Falkenstein’s ‘Finding Alpha: When Risk and Return Break Down’ — Seeking Alpha.

OK, I’ve never use the word blooping though I have often posted similar sentiments. I do like taking singles, but I love putting myself in a position for even greater returns with the same amount of risk. By risk I mean specific company and situational risk not some easily obtainable metric.

I look forward to checking out Falkenstein’s blog.

Merkel said “One core idea of the book is that risk is not rewarded on net. It doesn’t matter if you measure risk by standard deviation of returns, beta, or credit rating (with junk bonds). Junk underperforms investment grade bonds on average. Lower beta and standard deviation stocks overperform on average.”

Trying to formalise risk by any theory or metric is not something I have found useful, especially via basic metrics like beta and standard deviations. While there are common dangers in investments, risk is unique to each enterprise and each situation. No simple metric can capture that and thus are at best only useful as filters. I’m wonder if one filter is really a worthy of a core idea? Though in fairness Merkel covers eight of Falkenstein’s core idea is this excellent review.

Related posts:

1. Risk: Value vs Volatility
2. Volatility vs Risk
3. Risk Reduction Strategies