Hight: Stock-picking hit rates degrade to coin-flip randomness past position 30
Cameron Hight · Clare Flynn Levy and Cameron Hight - Moneyball for Managers (Capital Allocators, EP.43) · Mar 12, 2018 · at 1:02:33
Cameron Hight, CEO of Alpha Theory, explains the empirical hit-rate decay across portfolio position sizes underpinning his 'Concentration Manifesto'.
0:00 / 0:18exact quote · 18.7s
720p mp4 · rendered on demand · StarZero watermark
“The batting average for our clients was right around 51%. This is on an alpha adjusted basis, so the top 10 positions was 57%, next 10 was 55, next 10 Was 52, and then it went into, right after 30, it sort of went into randomness. Basically, it was a coin flip if you were picking a good stock or not.”
quote is from the automated transcript, cleaned for reading: filler sounds and stutters are removed, nothing is rephrased. names can be misheard (the analysis reads context, assessments check outside sources). how →
More from Cameron Hight
Hight: Managers unable to name their sixth-best idea have flawed processes
“Really the question that an allocator could ask is say, hey, what's your sixth best idea? And pause. And wait for them to tell you what their sixth best idea is. Now, if they can turn to a sheet, or a dashboard, or something like that, that says, that's my six…”
Hight: Simple equal-weighted algorithms outperform expert judgment across studies
“They've done hundreds, maybe even thousands of these studies now, and the little simple algorithm wins every time.”
Hight: Mental heuristics do not outperform systematic models for ambiguous inputs
“As a portfolio manager without the system, we're doing the exact same thing. We're already taking that information in, and we're processing it mentally, and it's implicit, and we believe that our mental calculator is better at taking those ambiguities and refi…”
Hight: Managers suffer 'probability inflation,' predicting 74% win rate versus 51% actual
“On average, our clients assume they're going to be right 74% of the time. But guess what? They're only right 51% of the time. So there's a big gap, and we can point out those gaps. We call it probability inflation.”
Hight: Active managers must concentrate into ~30 stocks to generate alpha
“If we as active managers want to survive, we need to do what we're good at, which is picking good stocks, and not diluting ourselves with portfolios of 100 plus stocks. If we can pick 30 good positions, 30 may not be the, there's no magic number here, it's gon…”
Hight: Portfolio managers should trim winning positions as expected return declines
“We find managers should be trading around positions more. They're generally not, and the positions that's easiest to ignore is the one that's working and making you money, and so what happens in that situation is the price is going up, which means the position…”