Investing

How much alpha do you have to generate to break even on the time spent to achieve it?

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  • Dec 31st, 2019 12:12 am
[OP]
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Sep 1, 2013
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How much alpha do you have to generate to break even on the time spent to achieve it?

An interesting attempt to provide a quantitative analysis of the risk vs. reward for an individual active investor:

https://mebfaber.com/2017/07/06/best-wa ... portfolio/
Lots of people study markets in the hopes of beating the market. What a lot of people don’t factor into their equation is the time spent to achieve that goal.

So, instead of figuring out how much extra juice we can squeeze out of that portfolio, let’s flip the equation around.

How much alpha do you HAVE to generate to break even on the time spent to achieve it?

Below, we take a look at a handful of scenarios for investors making between $50,000 to $500,000 per year, with portfolios ranging from $100k, to $10,000,000. We examine an investor who spends eight hours a week studying markets in hopes of beating a basic portfolio allocation. We chose eight hours at that was the responses to a poll of mine with over 500 votes on Twitter.

In nearly every case, it is a more realistic scenario to spend zero hours on investing, and simply work a few more hours and achieve a much higher yield on your entire portfolio.
The analysis depends on your salary (i.e. what your time is worth) and the size of your portfolio. There is a chart with several permutations, but to me, the 2 most realistic scenarios are someone who makes 100K and has either a 500K or 1M portfolio: with a 500K portfolio, you need to returns 4% above market average to justify the effort; with a 1M portfolio, you need returns 2% above average.
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Dec 2, 2017
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what if you do your research as a hobby (generally like doing that) and don't count this as work? How much extra return do you need to break even?
[OP]
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Sep 1, 2013
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EuRaFree wrote: what if you do your research as a hobby (generally like doing that) and don't count this as work? How much extra return do you need to break even?
I suppose that according to the analysis in the article, your time value per hour would be $0, so all you have to do is earn the average market return.

That being said, I enjoy to some extent reading about personal finance in books and online blogs, including learning the basics that any investor needs to know (proper diversification, tax issues, etc); I think the same could be said for most participants in the RFD investing forum, otherwise they would be doing something else with their spare time. But based on my unscientific, anecdotal experience with my family and friends, the average person out there finds dealing with personal finance and investing tasks to be "work", and would not do it as a hobby in their spare time. They may do it for the same reason they brush their teeth - a dull task, but something they discipline themselves to do because it is necessary.

In terms of the the actual analysis you need to perform to be a successful stock picker, I think it is fair to say that the overwhelming majority of people, say over 99% for sure, would consider this to be "work"
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May 11, 2014
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The study and premise is flawed here.

For one, 8 hours from a Twitter poll means exactly what? What is someone doing In those 8 hours. Did you read what he did to determine validity? DId you see his poll?
Screenshot_20191217-225317.png
It literally say 0-10 hours of tIme, 64% of respondents. How he got 8 hours is anyones guess here (this is why I hate alot of bloggers that make arbitrary numbers to fit their narrative). i can tell you I spend probably average 1-2 hours max a week focused on reading annual reports erc., unless you count me watching the news, reading the business section etc. which is part of my news reading. I'm also not sure if I should count my time on RFD either (I spend probably too much time here haha). So for him to get 8 hours from that poll seems very arbitrary and also skewed. And I wouldnt count me reading news or going to RFD as work. But the problem with this kind of poll is it doesnt define research. For all you know, anyone that voted for this poll might include watching some Youtube video or some get rich forum post about bitcoIn or marijuana stock and counted that as hours of "research."

A second problem would assume people have the ability to work more hours or be able to justify doing more work at the same job. Alot of people dont have that luxury or have workplaces that have anymore overtime or workable hours. So to then extrapolate that to say people should work more is problematic. And say if you would work an extra part time job, I would assume the pay rate would probably be lower than the main job.

Similarly to a part time job, even if the numbers presented as such should be looked at as accreditive income not whether it is worth it vs. working. People choose different ways to increase their money whether that be doIng active investing, being a landlord, asking for more OT , working a separate job or workIng UBER. One doesnt dismiss their part time job just because it pays less than their main job. Similarly, someone doing active investing may be OK if not still happy growing their extra funds in a slow, but easily accessible way that not only increases overall income/asset value, but is also a hobby for someoje.

And this is the reason why many blog research studies need to be looked with greater scrutiny. The conclusions they comr up with is assuming their interpretation of their data and their data is corrrect. Here, there is questionable assumptions from an arbitrary poll, then applied randomly to work hour comparisons.

I am lucky in this regard where I could potentially work more overtime than I even want. When I am on call, I have to get to the hospital, take a blood sample and have it running. During the sample analysis, I often have 30-45 minutes of waiting, guess what I do during those times? Being on call 3ish times a week means I do have time at 2 in the morning to do boring annual report readings etc.

I will say it is an interesting ideaof trying to count alpha as an hourly wage, but the analysis, presumptions and data here are very flawed.
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Deal Addict
Dec 4, 2016
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If you enjoy stock picking, the alpha would be negative, as it's entertainment you otherwise have to pay for. Just minimize commission cost, and count trading costs in your entertainment budget.
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Nov 9, 2013
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Edmonton, AB
It's an interesting way of thinking about "what is my time worth?" You can generalize this to all domains of life - house work, cutting grass, shovelling snow, etc. Naval Ravikant talks about setting a fixed hourly rate for your time to determine if the activities in you do in your life are really worth it. It sounds like Meb Faber is trying to apply the same idea to investing, although his approach isn't as elegant and simple as Naval's.

As mentioned by @EuRaFree it does exclude the hobby aspect - i.e. many of us do this because we enjoy it, not because we expect to get "paid" doing so. You are right though in that we are generally the exception, rather than the norm. The only thing is your target for this conversation is also the exception, rather than the norm.
Penalty Box
Dec 25, 2015
530 posts
322 upvotes
Canada
I think the greater question is does the investment strategy provide retirement safety, which is why one invests generally in the first place, so if the answer is yes, your still a winner, even though you wasted all the time investing and not doing it passively.

I've spend a lot time of investing and probably didn't get a good ROI. But I'm at the stage where I generally understand long-term investing and comfortable to invest in the long run. Also have developed a temperament to hold.

Hard to put a 'economic value' on that.
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Sep 23, 2007
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There is no confirmed correlation between time spent and return on investment. It is possible that you spend a lot of time on research and analysis, only to turn out that you are wrong and do worse than the market. Also, if you have a 9-5, and nothing better to do from 6-12, there's no real opportunity cost.
Deal Addict
Jul 27, 2017
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at my age, retired, time is my own, maybe simplify this as it relates too me.

I figure that I spend on average 30 minutes/trading day doing & researching my interests or investments.

not counting wasted time on RFD, which is leisure time.

since my fixed guaranteed income is OAS/CPP (based on Govt Canada averages), I set my hourly rate based on that.

based on the average OAS & CPP rate totaling $1286.62/mth combined or $15439.54/yr & that there are (24hrs*365days) 8760 hrs in one year, that there are 250 trading days/yr x 0.5hrs of active time or 125 hrs/yr on my investments/research.

now taking my income as $15439.54/8760 hrs available too me = $1.76/hr is my time cost

since there are 250 trading days, that I spend 1/2 hr average/day per those trading days or 125 hrs/yr x $1.76 = $220 I need to make yearly to cover the time spent/wasted doing market/stock research/time spent on my investments before I make any profit.

using real life numbers, take someone working (use your own take home pay for this) that has a take home pay of $52,000/yr divide that by 8760 hrs/yr their time is worth $5.93/hr & if they spend 125 hrs/yr (again use your own # hrs spent) on their investments/research,( 5.93*125hrs) they need to get net $741.25 of investment income before they start to make a profit.
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Dec 4, 2016
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OK, on a serious note, the time spent reading this forum helped me avoid RESP group plans, which my much smarter co-worker was tricked into. Since these group plans are so terrible, the difference between a 100k (couch potato with index fund, shown by a few posters) RESP and 30k RESP (lower nominal dollar than what I put into, also shown by a few posters) would be 70k over the course of one RESP. Even if it takes equivalent of half years of full time employment for me to learn this, it's still 70k/1000 hours = $70/hour, taxed at my daughter's future marginal tax rate during undergrad. Seems pretty good to me.

Now if browsing RFD investing helps me avoid 2% MER at TD, making the difference between 500k portfolio at retirement and 300k portfolio at retirement, the return on time invested is even higher.

Perhaps it's not "alpha", as the original question intended, but it's still time invested that has a positive impact on my net worth. It does have a diminishing return aspect to it -- learning about withholding tax in U.S. RRSP account, and learning Norbert's Gambit, would probably save me 2.5% of total portfolio over a decade. Hence I haven't bothered to do it yet.
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Apr 23, 2009
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CheapScotch wrote: An interesting attempt to provide a quantitative analysis of the risk vs. reward for an individual active investor:

https://mebfaber.com/2017/07/06/best-wa ... portfolio/



The analysis depends on your salary (i.e. what your time is worth) and the size of your portfolio. There is a chart with several permutations, but to me, the 2 most realistic scenarios are someone who makes 100K and has either a 500K or 1M portfolio: with a 500K portfolio, you need to returns 4% above market average to justify the effort; with a 1M portfolio, you need returns 2% above average.
Let me flip that and ask this:

Take your hourly rate of salary and compare that to your hourly return from investment on a standard 8 hours per day unit.

If you are generating less return per hour of your time from salary, then you know what to do.

It is that simple.
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Jul 27, 2017
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@ruchir, that doesn't work when you are retired or does it?

and how do you factor in 24/7 or that 8760 available hrs/yr?


ruchir wrote: Let me flip that and ask this:

Take your hourly rate of salary and compare that to your hourly return from investment on a standard 8 hours per day unit.

If you are generating less return per hour of your time from salary, then you know what to do.

It is that simple.
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Apr 23, 2009
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xgbsSS wrote: i can tell you I spend probably average 1-2 hours max a week focused on reading annual reports erc., unless you count me watching the news, reading the business section etc. which is part of my news reading. I'm also not sure if I should count my time on RFD either (I spend probably too much time here haha).
I don't even read annual reports. I just read their earnings call Q&A and the full transcript. Those analysts ask really great questions. The only time I read annual reports is when I am buying a stock at 50% discount and want to make sure that the stock is not going to get delisted or bankrupted.

How much reserach do you really need to buy top 10 Dividend Kings and top 10 Dividend aristocrates?
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porticoman wrote: @ruchir, that doesn't work when you are retired or does it?

and how do you factor in 24/7 or that 8760 available hrs/yr?
That was intended as pun for folks that equate investing to work.

Jokes aside - if you think in terms of ROI on time spent, wouldn't you agree that the returns are the highest per unit of time when you invest, compared to anything else?

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