martes, 8 de enero de 2019

"Delivering Alpha": a great book by Hilda Ochoa-Brillembourg

“Delivering ALPHA” is a book on finances, on how to invest and deliver Alpha, those financial returns that exceed a given bench mark index.  It is not a book on finance theory but a distillation of the methods utilized by the author, Hilda Ochoa-Brillembourg, to deliver Alpha for decades, while Chief Investment Officer at the World Bank and, later, as CEO of her own firm.  In the words of the author is a practical guide to building intelligent, sensible, and sensibly managed portfolios that will deliver Alpha consistently over time.
This highly specialized subject would limit the reading of the book to those who share those arcane interests, right?
Well, wrong. I know nothing about the subject and probably never will.  As they say in my home country, Venezuela, old parrots do not learn to talk.  I have no money to invest in the markets, so I cannot profit from the wisdom of the author on the subject. Still, I have enjoyed this book immensely because it also happens to be a guide on how to live sensibly. The lessons learned by Ochoa-Brillembourg in her World Bank career and, later, in running her company, have direct and evident application to the manner we choose to live our lives.
In addition, and as a great bonus, I was captivated by the crystal clear, crisp, truly outstanding prose.
The first one of these lessons says:  Price is not value.  In finance as in life there is a market price which is the same to all buyers but value is different to different buyers, being a function of its synergistic value when combined with your financial or human portfolio. The author tells us: “The largest factor influencing such value, other than price, expected return and risk, is the correlation of the asset to the rest of your portfolio”. With this statement we are introduced to one of the main lessons of the book, The Fit Theory.
The Fit theory stipulates that not only the price and intrinsic value of the asset are pertinent to our choice but as important is the fit to our own needs and circumstances. To illustrate this concept Ochoa-Brillembourg utilizes a candid and fascinating example, how she went about choosing a husband. In deciding to marry the person with whom she has now been married for more than 40 years the author utilized a decision mechanism that, although  might not sound 100% romantic,  made all the sense in the world and guaranteed its success.  Using it, the author says, allowed her to incorporate her husband as a most worthy asset to her portfolio, the best fit to her professional and personal life. Although he was not a good dancer he brought to marriage the fundamental qualities that more than compensated for his rhythmic deficit.   
Although the book is primarily written with the large investors in mind it can also be of great help to the small investors. Such is the admonition: “Don’t bet the house”, since it is impossible to be certain of anything, in spite of how strong the evidence. For me, this sensible advice came 25 years too late. When I had the money I was led by a large investing firm to place up to 30% of my savings in a real estate project in Florida that could not miss and in which, the firm assured me, “our senior partners had large participation”. I lost a significant chunk of my savings, a blow from which I never could recover.
Another excellent advice has to do with good governance within the financial advisory groups. The author says: portfolios don’t easily recover from permanent losses created by bad governance decisions.  The worst enemies are those within not without. External threats can be managed but bad management is the real threat.
The chapter on the Wisdom of Teams is particularly interesting. The personal experience of the author is that collaboration among the team members is the key to success. This might sound as a cliché but the reality is that in practice, these teams, as well as political cabinets or corporate boards, are too frequently dominated by the chairman, by the president or by a forceful individual in the group. She says that in her company she installed an office of the Chief investment Officer composed of three or more experts, each with equal authority, ensuring that multiple minds contributed to decision making. This is a lesson that many governments should listen to.
I was specially attracted by the chapter on Governing for Success in which the author discusses the issue of ethical standards in Investment Committee members. She states: “Personal agendas have no place in fiduciary committees… they should be disclosed and the member excluded from voting”.
One of the most important policy decisions the author contributed to her stay at the World Bank was the addition of junk bonds to the portfolio of the institution and how this decision contributed to delivering Alpha.
I could not help to compare Ochoa-Brillembourg treatment of Investment Policy with the Venezuelan treatment of Constitutional Policy. She says: “Like a constitution, an investment policy should be written broadly and allow for ample flexibility or it won’t survive long when circumstances change. Even if the policy is flexible, committee members should expect that it will need to be amended from time to time. It should be viewed not as holy writ but as a living document, subject to routine review for relevance and appropriateness”. The very same concepts she uses for investment policy should have been applied to our 1999 Venezuelan constitution, which is extremely prescriptive and, as a result, impossible to comply with.
There is a lot more in this great book which makes for compelling reading. It can be read in multiple levels.

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