Is there any more complex game than investing?
Over my career, I’ve bought and sold companies as well as stock. Both transactions deserve equal analysis because both involve judging whether the price we pay is fair. And yet we put far more care and research into buying a company than buying a piece of one.
When we buy a piece of a business like General Motors with all its brands and models, we are also buying research and development, manufacturing across countries, and warranty obligations on millions of vehicles. It would take weeks to get my arms around GM in detail. Yet with all those moving parts, we somehow agree that at 9:11 A.M. on a Monday, a share of GM stock was worth exactly $81.01124 — and two seconds later it was worth $81.12. What insanity is this?
Welcome to the auction of opinions, because no one really knows whether any trade is good until later. And often we don’t even know what “later” means, because people just hold until they can profit.
So how do we invest responsibly when none of us can claim to fully understand the thousand-plus companies our models cover, while computer-driven systems trade shares multiple times per second?
We measure signal strength. Computers have given us something remarkable: the ability to separate genuine edges from everyday trading noise. The signal we care about most is alpha, the excess returns earned for the risk taken. Alpha is the most valuable return because it validates that our selection process is actually working, not just riding the market.
We hunt alpha. And in the next piece, we'll show you how we measure whether we've actually caught any.
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