Transcending Gravity: The Myth of Alpha

Since the blog is called know alpha, might be good to actually talk about Alpha.
Alpha, in the investment sense, means did you, or the mutual find, or the money manager, outperform the index. The index frequently used is the S&P 500, but it could be any index covering a broad swath of stocks, or in the case of bonds, a bond index.
The popular measuring formula is called Jensen's Alpha, not-coincidentally named after Mr. Jensen.
The difficulty with Alpha, is twofold.
First, let's say I'm measuring my portfolio of 20 stocks against the S&P 500. Right off, there's more risk with 20 stocks versus 500. Based on the law of risk and reward, I should do better than the S&P during good markets, or worse during bad ones. (This presumes they are diversified to a reasonable degree, not 20 gold stocks, or 20 real estate stocks. If the 20 stocks are all one industry, then there is even more risk, which is fine if that's what you're shooting for.)
Second, our friend Beta pops up in the formula for Alpha. You can read about the difficulty with Beta in a prior post.
In sum, there is no such thing as Alpha based on any repeatable evidence. A one shot measurement may demonstrate what is called Alpha, but change the length of time, the Beta changes, so the Alpha changes. If you doubt me, look it up. Google Jensen's Alpha and discover that even when money managers allegedly demonstrated Alpha, out performance, the Alpha disappeared when accounting for fees and expenses.
The postscript is this:
All performance measures tell you about the past. They use fixed numbers of past performance, or relative correlations of fixed numbers. That's fine if you are doing Newtonian physics. You can even get a man on the moon, repeatedly. (With the unfortunate surprise of occasionally blowing up the vehicle.)
The market future is variable, every minute, every day. The idea that a complex series of behavioral interactions among millions of investors will be repeated closely enough to use as a predictor is just that, an idea, a wish, a dream, and just as insubstantial.
Think of it this way. Anyone who can consistently beat the market just isn't going to clue you in about it. Why? Because that person is destined to own everything marketable. He/she has to, for a simple reason. His pile would keep getting bigger as other piles shrink. He can't do that if he runs around letting other people join in the fun by paying a fee.
Don't worry, it can't be done. Even by debonair, billionaire, hot air, investment bankers with BIG SWINGING...computers. Eventually, they crawl out too far on a limb, and their pile evaporates. You, me, or the man behind the tree cannot repeal the law of risk and reward. It's the gravity of investing.