How much alpha do you really need to generate?

Cam019 said:

I was listening to an Equity Mates Investing Podcast episode with Meb Faber yesterday afternoon which lead me to an article of his, which you can find here, that hit me like a tonne of bricks. The basic premise was this - Are you generating enough alpha p.a. to justify the amount of time you are spending each week either doing investment research, trading or studying the markets?

Below is the table from the article that shows, generally speaking, how much alpha you need to be generating p.a. dependent on your salary, portfolio value, and the amount of hours you spend on research or trading per week. Obviously there is an element of crudeness here, so I don't want to hear your complaints about the inaccuracy of the values used within the table, adjust them to suit your own personal circumstances if need be.

This was an eye opener for me because time is only commodity that we can never get back. I also have quite a few carry forward losses from the last three financial years which proves even with all the study I have been doing; I have not been outperforming the index.

For me though, there is something even more startling. I am in the lowest salary bracket and I would have never had more than $4,000 to allocate to the markets at any one time. Substituting that in, I would need to generate 250% p.a. in alpha to justify the time I have been spending either researching stocks, trading, etc. 250%!!

Personally, I am moving away from trying to stock pick or trade, to something like VDHG and reclaiming my 416 hours per year.

Food for thought.

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InsvestoBoy said:

I like Meb Faber, but is this right?

The biggest assumption is that the value of your time is constant and the value of extra money is only defined by value of your time?

Forget the markets for a second.

Let's say both you and your friend make $50,000 a year working a 40 hour a week job, so you both earn ~$24/hr gross.

Between rent and bills and food and whatever basic expenses, you are left with no surplus cash to save.

You decide to take on an extra job working Friday and Saturday night at the local pub. Between wages and tips, you only earn $18/hr doing this, and it's only for 8 extra hours a week. Your friend is a bit lazier and decides to do nothing.

At the end of a year, you have saved ~$7500. After 5 years, you will have saved ~$37,500. Let's say every year you invest that money conservatively and manage to earn 3% nominal returns a year for doing so.

At this point, your friend will have nothing.

You will have:
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According to the above chart, it wasn't worth it, because you didn't generate enough "returns", to "break even".

is that right?

Was it worth it, to work those extra 8 hours a week, or not?

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