A potential reader of this book with a cynical bent might well ask an obvious question: “If those folks at Goldman Sachs who wrote this book really knew anything worthwhile about investing, why would they put it together in a book where
all of their competitors could find it?”
It’s a good question, because it leads naturally to the kind of thought process
this book is really all about. The question might be rephrased in a way that makes
our motivation for writing the book a little more clear: “Why, in equilibrium,
would a successful investment manager write a book about investment management?” By “in equilibrium” we mean in an investment world that is largely efficient
and in which investors are fairly compensated for risks and opportunities understood and well taken. Suppose there is wealth to be created from careful and diligent pursuit of certain rules of investing. Suppose further that one were to write
those rules down and publish them for everyone to follow. In equilibrium, wouldn’t
those sources of success disappear? Somehow it doesn’t seem to make sense for
good investment managers to write books about their craft. Indeed, many sources
of investment success, in particular those with limited capacity, would eventually
disappear with increased competition. What we have tried to do in this book is to
focus on other types of phenomena, those with a capacity consistent with the equilibrium demand for them. In equilibrium these types of phenomena would remain.
Consider an example of a phenomenon with limited capacity. Suppose it were
the case that looking at publicly available information one could easily identify certain stocks (for example, those with small capitalization) that would regularly outperform other stocks to a degree not consistent with their risk characteristics. We
would expect that if such a strategy were published and widely recognized, then the
prices of such stocks would be bid up to the point where the costs of implementing
such a strategy just about offset any remaining excess returns. In other words, we
would expect such a phenomenon to disappear