The Case for Alpha

Great surfers are more than athletic balance machines who can paddle fast and hold their breath for superhuman times during crazy wipeouts.

Some people argue that the "best of the best" are really those that can truly sync with the ocean and its waves.

Kelly Slater, whom you may know as one of the greatest, was rumored to get into a trance back in the sand before even touching the water.

His study of the ocean would last for days before a competition; but when he got into the ocean, he was the GOAT at being in the right spot.

He had read the currents, examined the winds, studied the swells, and knew exactly where to position himself.

Just like Kelly, great alpha seekers are those that can see beyond the obvious trends and can position themselves at the best entry and exit points on large waves

So here’s my take on generating Alpha for those who don’t just want to sit passively in index trackers:

When thinking about the best next investment, the first thing you should do is stand in the sand before jumping into the ocean.

Watch the energy build up, observe the trends that are sure to last, and set yourself up to catch those big waves.

And how do you do that?

By understanding what truly creates value, and not what is a more superficial trend (sorry Peloton).

Value comes from technologies that enhance productivity, reduce effort, and exponentiate other value creators. Think about robotic assembly line technology, graphical processors, or transportation and energy enhancement tech.

Questions or answers?

So what’s the obvious swell shoring up?

You already know it. It’s AI.

And just how do we ride this wave?

Unfortunately, that’s the billion-dollar question.

• You could ride this one on companies like Nvidia, or maybe OpenAI if it ever becomes public
• You could invest in MSFT and Google as they are likely to continue investing heavily in this sector
• You could think about self-driving and automation as an important vertical if you believe in companies like Tesla, ON Semiconductors, or Albemarie

The great thing is that this ecosystem has a ton of options.

And if those developing the tech are not your cup of tea, think of who will benefit the most from AI use.

• Is it the logistics companies through automation?
• Cybersecurity through intelligent data encryption?
• Healthcare through automatic tumor detection?

There will be no free lunch here, but a bit of research and conviction can generate a fantastic portfolio that could stand to benefit multiples above the S&P

Will the risk be higher?

Likely…or at least that’s what simple financial theory tells us.

However, my bets would still be on those companies with exponential potential rather than those just benefitting from short-term trends like GoPro once did.

Either way, pick your companies, but diversify.

Once you see the right wave, double down and convict.

Just don't forget that in every set, the first wave is usually a distraction

Additional Illustrations:

To conclude, here are other waves that have created immense opportunities and some examples of companies that benefitted in different ways and at different times.

1.??????Telecommunications - Cell Phones – Apple, Motorola, ATT

2.??????Computers – Processors – Intel, NVIDIA, TSMC

3.??????Software – Graphical Operating Systems – Microsoft, Apple

4.??????Internet – Search – Google (Info) Amazon (Products)

5.??????Website - Social Media – Facebook, LinkedIn, TikTok

As any great surfer will tell you, there will come a time in which you have to get off a wave and move on to the next one; sometimes that will be quicker than you would like

While it wasn’t immediately obvious that Google would be the winner in search, at some point it became much more likely that not that Google would be a top player, if not the top one.

Jumping off other waves could have allowed you to ride this massive one.

Remember, there will only be a handful of waves that will last decades

Most will swallow you up and teach you lessons; but it’s important to know how to roll with the wipeouts and muscle up the courage to get back out there.

Try to not get off the board (see my article on time in the market), but if a storm is brewing, spend time studying the waves and catching your breath before jumping back into choppy waters and unpredictable currents...

Something is bound to reveal itself with enough patience.