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The Incredible Shrinking Alpha: And What You Can Do to Escape Its Clutches
Alpha still exists! But that doesn't mean it is easy to find, or even worth the pursuit.Larry Swedroe, author of the bestselling series of The Only Guide investment books, and co-author Andrew Berkin bring you the quantitatively chilling tale of The Incredible Shrinking Alpha. As aficionados of classic science fiction, Swedroe and Berkin saw similarities between the monumental struggle of Scott Carey, novelist Richard Matheson's Incredible Shrinking Man, and that of every individual investor trying to beat the market. Swedroe and Berkin explain in academic yet simple terms what is happening to the alpha for which so many investors yearn.Offering compelling data from decades of academic research, Swedroe and Berkin present the hard truth as they know it — it's not worth the time or effort spent battling to win those few extra cake crumbs. Instead, focus on the things you can control and discover what life has to offer beyond the quest for alpha.
106 pages, Kindle Edition
First published January 14, 2015
73 people are currently reading
400 people want to read
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Displaying 1 - 23 of 23 reviews
January 6, 2016
The Incredible Shrinking Alpha is concise, well-written, and dense with quality content--more such finance books should be so. One particular highlight captures the books' claims well:
"Instead of focusing your efforts on generating alpha, you should focus on the four critical things you can actually control: What risks do you want to take—what asset classes and factors do you want exposure to—and how much exposure should you have to each? Diversifying the risks you take sufficiently to minimize idiosyncratic (uncompensated) risks. Invest only in passively managed vehicles. By that we mean funds whose construction rules are evidence-based (as opposed to being based on opinions), transparent, and implemented in a systematic way. Keep all of your costs low, including fees and taxes."
"Instead of focusing your efforts on generating alpha, you should focus on the four critical things you can actually control: What risks do you want to take—what asset classes and factors do you want exposure to—and how much exposure should you have to each? Diversifying the risks you take sufficiently to minimize idiosyncratic (uncompensated) risks. Invest only in passively managed vehicles. By that we mean funds whose construction rules are evidence-based (as opposed to being based on opinions), transparent, and implemented in a systematic way. Keep all of your costs low, including fees and taxes."
This entire review has been hidden because of spoilers.
August 21, 2018
The Incredible Shrinking Alpha ́s core purpose is to show that active management is futile and as “alpha has become beta” those futile odds have been lowered even more compared to the 1950s. One of the authors, Larry Swedroe is a well-known proponent of investing in ETFs, while Mr. Berkin works at Bridgeway, an active user of ETFs within their products. A disclosure is justified here. This reviewer has a day job of gracing the savannah of active equity management. But while the books with related topics by John Bogle and Charles Ellis have resonated with me and added to the thinking around indexation, this book merely comes across as trying to make a quick buck.
A large part of the book is spent on how returns over time have morphed from alpha to beta. For those of you who have not kept up with this battle of brains throughout the years, it has got to do with the following: After publishing the theories behind the efficient market hypothesis (EMH) other academics later produced studies that disproved this. These discovered “anomalies” to the EMH were later reclassified as rational “risk factors”, such as the small cap factor, value factor, momentum factor, quality factor and counting. All this is of course in hindsight, after the fact. But the book treats them as predictable stating “once again alpha becomes beta”.
So decades after Warren Buffett, Peter Lynch and lesser-known peers have produced superior results, they are removed by the stroke of a pen as “just exploiting a factor”. Did Buffett make his 1967 acquisition of National Indemnity in an afternoon because he recognized that the P/BV-factor would be the best anomaly to exploit during the next 50 years? Or Coca-Cola in 1988 because of the Gross Profitability Factor that was to be “discovered” by Novo-Marx in 2012? An active manager “exploiting a factor” is now as the authors see it turned into an “evidence-based, transparent and systematic” strategy under the hood of an ETF. Where were the momentum-, value- and quality EMH:ers in 1981 when the size-factor was discovered? And what alpha-returns of today will later be labeled beta?
The format of the book goes something like this: one chapter each on problems at hand (“No more alpha to chase for active managers”), why it was not a problem before, details about the problem and finally what the solutions are (“here is how we can help”). This runs to 90 pages, and the rest is a series of appendices on related studies, references and various advice.
The main problem with the book is the blending of correlation and causation, facts and fiction, ex-post and ex-ante and just large-scale confusion of whom this book is really for. These shortcomings are a pity, because the main point of harder relative competition for returns are likely correct. This ought to have serious implications on work processes and utilization of fundamentally based active management. In this the bigger picture is lost: Whether or not it is active managers searching for alpha or EMHers launching smart beta ETFs, we should all look for maximum real returns! Our fiduciary duty are toward the final saver, and whereas the capital market is a relative zero-sum game it is certainly not so in an absolute sense. Just ask any Argentinean and she will tell you all about it. As index-vehicles just return what the corporate averages give them, there is no God-given right to the highest possible return. There is no consideration of the Darwinian effects of capital allocation, business ethics, creating new profit streams & employment – all affecting the public return from equities. The end game of an all- indexed world is perhaps the most obvious problem of the free-rider status of passive funds.
The authors do the little investor no favor by luring them into vehicles like ETFs where the lower cost potential are eaten for breakfast by overtrading. And the book is frustratingly long on stripping the performance records of Buffett, Swenson et al, and very short on discussion points on how to maximize real return over time.
A large part of the book is spent on how returns over time have morphed from alpha to beta. For those of you who have not kept up with this battle of brains throughout the years, it has got to do with the following: After publishing the theories behind the efficient market hypothesis (EMH) other academics later produced studies that disproved this. These discovered “anomalies” to the EMH were later reclassified as rational “risk factors”, such as the small cap factor, value factor, momentum factor, quality factor and counting. All this is of course in hindsight, after the fact. But the book treats them as predictable stating “once again alpha becomes beta”.
So decades after Warren Buffett, Peter Lynch and lesser-known peers have produced superior results, they are removed by the stroke of a pen as “just exploiting a factor”. Did Buffett make his 1967 acquisition of National Indemnity in an afternoon because he recognized that the P/BV-factor would be the best anomaly to exploit during the next 50 years? Or Coca-Cola in 1988 because of the Gross Profitability Factor that was to be “discovered” by Novo-Marx in 2012? An active manager “exploiting a factor” is now as the authors see it turned into an “evidence-based, transparent and systematic” strategy under the hood of an ETF. Where were the momentum-, value- and quality EMH:ers in 1981 when the size-factor was discovered? And what alpha-returns of today will later be labeled beta?
The format of the book goes something like this: one chapter each on problems at hand (“No more alpha to chase for active managers”), why it was not a problem before, details about the problem and finally what the solutions are (“here is how we can help”). This runs to 90 pages, and the rest is a series of appendices on related studies, references and various advice.
The main problem with the book is the blending of correlation and causation, facts and fiction, ex-post and ex-ante and just large-scale confusion of whom this book is really for. These shortcomings are a pity, because the main point of harder relative competition for returns are likely correct. This ought to have serious implications on work processes and utilization of fundamentally based active management. In this the bigger picture is lost: Whether or not it is active managers searching for alpha or EMHers launching smart beta ETFs, we should all look for maximum real returns! Our fiduciary duty are toward the final saver, and whereas the capital market is a relative zero-sum game it is certainly not so in an absolute sense. Just ask any Argentinean and she will tell you all about it. As index-vehicles just return what the corporate averages give them, there is no God-given right to the highest possible return. There is no consideration of the Darwinian effects of capital allocation, business ethics, creating new profit streams & employment – all affecting the public return from equities. The end game of an all- indexed world is perhaps the most obvious problem of the free-rider status of passive funds.
The authors do the little investor no favor by luring them into vehicles like ETFs where the lower cost potential are eaten for breakfast by overtrading. And the book is frustratingly long on stripping the performance records of Buffett, Swenson et al, and very short on discussion points on how to maximize real return over time.
December 24, 2017
Interesting read about the folly of chasing alpha. 4 hurdles to alpha generation: (1) what was once alpha is now recognised as beta, (2) pool of individual investors to exploit is shrinking, (3) manager competition is intensifying, and (4) amount of assets competing for the scarce resource is growing. Investors should favour low cost, passively managed or structured funds.
September 17, 2025
2/5 ★'s
Eh, really clunky of a book.
Nonfiction books are hard to really compare apples to apples. There was definitely some interesting things about this book, but overall it screamed "Have 1000 words as an investment study by my desk." The TL;DR is:
Alpha = returns above what you'd expect after adjusting for risk.
Beta = returns driven by exposure to risk factors (market risk, value, size, etc.).
The central thesis is: Alpha is hard to come by—and getting harder. Because much of what people used to think of as alpha is now explained by known risk factors, because competition is increasing, because costs drag returns, and because there are fewer "mistakes" in the market for active players to exploit.
Eh, really clunky of a book.
Nonfiction books are hard to really compare apples to apples. There was definitely some interesting things about this book, but overall it screamed "Have 1000 words as an investment study by my desk." The TL;DR is:
Alpha = returns above what you'd expect after adjusting for risk.
Beta = returns driven by exposure to risk factors (market risk, value, size, etc.).
The central thesis is: Alpha is hard to come by—and getting harder. Because much of what people used to think of as alpha is now explained by known risk factors, because competition is increasing, because costs drag returns, and because there are fewer "mistakes" in the market for active players to exploit.
March 8, 2021
one-sided
May 18, 2023
Some very good information, but also a lot of redundancy
This book is very similar in both content and format to John Bogle's writing. A seemingly endless stream of reiteration of a few key points (mainly choose passive funds over active management.) There was a lot of very good information and I was especially interested in learning about how to compare and evaluate different funds that offer similar products (such as an emerging market or a small cap value fund), but a LOT of the book is spent restating the point that active management has historically underperformed passively structured funds fair a vast majority of the time. There are a million references to articles, books, and studies, but this could have been just as effectively compressed into one chapter. The same points are often made in multiple chapters, then referenced almost verbatim, THEN summarized at the end of the chapter. These things, along with the multiple pages of testimonials at the beginning made this feel too padded out to justify its length.
Having said that, I would still recommend the book to anyone who wants to build a sustainable, long term portfolio. Especially a retirement portfolio. I do think the asset allocation options described will help most people develop a plan based on their risk tolerance, situation, and time horizon. I also appreciate the guidance on minimizing expenses and even the mental preparation for how to handle fluctuations in the market without panicking.
This book is very similar in both content and format to John Bogle's writing. A seemingly endless stream of reiteration of a few key points (mainly choose passive funds over active management.) There was a lot of very good information and I was especially interested in learning about how to compare and evaluate different funds that offer similar products (such as an emerging market or a small cap value fund), but a LOT of the book is spent restating the point that active management has historically underperformed passively structured funds fair a vast majority of the time. There are a million references to articles, books, and studies, but this could have been just as effectively compressed into one chapter. The same points are often made in multiple chapters, then referenced almost verbatim, THEN summarized at the end of the chapter. These things, along with the multiple pages of testimonials at the beginning made this feel too padded out to justify its length.
Having said that, I would still recommend the book to anyone who wants to build a sustainable, long term portfolio. Especially a retirement portfolio. I do think the asset allocation options described will help most people develop a plan based on their risk tolerance, situation, and time horizon. I also appreciate the guidance on minimizing expenses and even the mental preparation for how to handle fluctuations in the market without panicking.
August 24, 2022
Relatively up-to-date book on factors and why indexing will suit you better than picking stocks.
There is not much I can disagree on with the book. All ideas are backed by papers, and most of them are general knowledge by now. The book is short and concise, a good place to start your research on the topic.
Would give a 5 stars if authors would point readers to books instead of scientific papers. I understand that papers are the source of the ideas, but they are written in technical jargon, on top of that, most of them are behind the paywalls if you choose to read them. There are plenty of books on factors going deeper into the subject.
For everyone who will or has already read the book;
In physics, if a theory is convoluted or has "exceptions to the rule", it is deemed wrong. I understand that we are talking about social science here, but the rule still stands. If the efficient market theory needs 100+ factors (More or less that is the number of factors published up to date) to describe the anomalies in the efficient market. In my humble opinion, that idea doesn't hold water.
You might also want to keep in mind that finding, after the fact, which factors the great investors exploited doesn't lower their outstanding track records.
The Efficient Market hypothesis is flawed, sometimes plain wrong, but it is still the best we come up with to date.
Despite all the above critics of the theory, I still believe indexing will really serve you best.
There is not much I can disagree on with the book. All ideas are backed by papers, and most of them are general knowledge by now. The book is short and concise, a good place to start your research on the topic.
Would give a 5 stars if authors would point readers to books instead of scientific papers. I understand that papers are the source of the ideas, but they are written in technical jargon, on top of that, most of them are behind the paywalls if you choose to read them. There are plenty of books on factors going deeper into the subject.
For everyone who will or has already read the book;
In physics, if a theory is convoluted or has "exceptions to the rule", it is deemed wrong. I understand that we are talking about social science here, but the rule still stands. If the efficient market theory needs 100+ factors (More or less that is the number of factors published up to date) to describe the anomalies in the efficient market. In my humble opinion, that idea doesn't hold water.
You might also want to keep in mind that finding, after the fact, which factors the great investors exploited doesn't lower their outstanding track records.
The Efficient Market hypothesis is flawed, sometimes plain wrong, but it is still the best we come up with to date.
Despite all the above critics of the theory, I still believe indexing will really serve you best.
May 3, 2023
The author has extensively used data/research to emphasize the idea that it is getting tougher and tougher to generate alpha in active management. The book makes you think and resonates at many key ideas.
Loved reading this one.
Loved reading this one.
October 30, 2023
good laymen explanations of academic research
October 13, 2025
Contained no information not previously covered better in the author’s other works.
Want to read
December 23, 2025For personal reference:
“best investment books ” according to Michael Kitces
“best investment books ” according to Michael Kitces
August 15, 2018
Solid explanation about the underpinnings of evidence-based investing, and how even if you could find price anomalies in the market, it probably isn't worth the time spent.
January 1, 2017
A good and concise book that focuses on advancement of passive funds over actively managed funds. The authors back the premise through a great body of research. Bottom line create your portfolio that produces higher returns after tax and fees.
March 30, 2021
Among the Incredibly Shrinking Worthy
In the vast pulp of the investment and trading advice space very few articles, posts, blogs and books are worthy keepers. But this book is one of them. Why? Not because it is Alpha. Really its a pretty beta rehash of available research, “nothin but the facts mam”. But popular access to objective facts are a shrinking commodity in the sea of promotional fake news. Nor does it lack shortcomings. In its relentless explanations of the impossibly of Active Management consistently beating passive totality, it would have been more powerful to explicitly include individual traders actively managing their own accounts along the the same basis. Readers can at least draw the lesson, if the Yale dudes and other brightest and best with unlimited fire power can’t persistently foretell tomorrow how self delusional am I if I just “try harder”?
In general, for its lightness in specific guidance and perhaps over faith in beating the market via factor based alpha, this would be a 3-4 star read. What pushes it to 5 is the appendixes. There one finds among other goodies the extraordinarily uncommon truth about the reality of what dividends are: Divisions of capital cleaved off share price and returned to holders rather than income returns. There is nothing sinister about this reality. Receiving a dividend stream may be a cornerstone of cost effective (zero commission) steady little drawdowns of ones capital when at that phase. But hyping it as if it was interest and a magical way to make the gyrations of price next to irrelevant, is surely one of the fundamental and most lucrative lies of the hype machine. So much more deserves to be expanded, for non academic ma and pop investors, on the side topic of dividends.
There is also so much more to be gained by pursuing the logic of the passive/active beta/alpha realities deeper. Authors that do so won’t get many Talking Head gigs, reward their efforts to expand such rare education in this space.
For lifting the veil also on dividends and also considering the book’s no-excuse-not-to click Shrinking price, the 3.5 of an already worthy digest becomes an Incredibly rarely deserved 5 star. Sail on!
In the vast pulp of the investment and trading advice space very few articles, posts, blogs and books are worthy keepers. But this book is one of them. Why? Not because it is Alpha. Really its a pretty beta rehash of available research, “nothin but the facts mam”. But popular access to objective facts are a shrinking commodity in the sea of promotional fake news. Nor does it lack shortcomings. In its relentless explanations of the impossibly of Active Management consistently beating passive totality, it would have been more powerful to explicitly include individual traders actively managing their own accounts along the the same basis. Readers can at least draw the lesson, if the Yale dudes and other brightest and best with unlimited fire power can’t persistently foretell tomorrow how self delusional am I if I just “try harder”?
In general, for its lightness in specific guidance and perhaps over faith in beating the market via factor based alpha, this would be a 3-4 star read. What pushes it to 5 is the appendixes. There one finds among other goodies the extraordinarily uncommon truth about the reality of what dividends are: Divisions of capital cleaved off share price and returned to holders rather than income returns. There is nothing sinister about this reality. Receiving a dividend stream may be a cornerstone of cost effective (zero commission) steady little drawdowns of ones capital when at that phase. But hyping it as if it was interest and a magical way to make the gyrations of price next to irrelevant, is surely one of the fundamental and most lucrative lies of the hype machine. So much more deserves to be expanded, for non academic ma and pop investors, on the side topic of dividends.
There is also so much more to be gained by pursuing the logic of the passive/active beta/alpha realities deeper. Authors that do so won’t get many Talking Head gigs, reward their efforts to expand such rare education in this space.
For lifting the veil also on dividends and also considering the book’s no-excuse-not-to click Shrinking price, the 3.5 of an already worthy digest becomes an Incredibly rarely deserved 5 star. Sail on!
April 4, 2021
Managed funds are bad, index funds are good. If you haven't read anything by Swedroe before, this is a good introduction to his thinking and writing style. He is well researched and highly analytical, his points are made clearly and cogently. He makes a strong case for passive investment strategies and why it is getting harder and harder to beat the market.
This is the same case he makes equally clearly and cogently in {42925681]Your Complete Guide to a Successful and Secure Retirement, where you also get some suggestions on alternate investment strategies and portfolio balancing, incorporating Social Security and Medicare into your planning, etc. I didn't see anything in Shrinking Alpa he hadn't previously covered, and thought there was more content in Secure Retirement. Unless you are sharpening an ax to do battle with defenders of active management get the latest edition of the second one and skip the first.
This is the same case he makes equally clearly and cogently in {42925681]Your Complete Guide to a Successful and Secure Retirement, where you also get some suggestions on alternate investment strategies and portfolio balancing, incorporating Social Security and Medicare into your planning, etc. I didn't see anything in Shrinking Alpa he hadn't previously covered, and thought there was more content in Secure Retirement. Unless you are sharpening an ax to do battle with defenders of active management get the latest edition of the second one and skip the first.
December 11, 2019
IN 1945 INDIVIDUALS HELD 90% OF CORPORATE LISTED EQUITY. 48% IN 1980 AND 20% IN 2008. THERE ARE LESS PATSIES TO BEAT. IN CONTRAST THE NUMBER OF MUTUAL FUNDS IS 14X HIGHER THAN IN 1979.
The best predictor of relative fund performance is the expense ratio.
Being one of the first to discover a strategy that beats the market is what will buy you a yacht, not copying the strategy after its already known.
The efficient market believer doesnt say that there are not undervalued companies on the market, just that it doesnt pay to go looking for them.
Stocks tend to fail at the worst possible times, such as during recessions when your labour capital can be subject to increased risk.
Active management is the triumph of hype, hope and marketing over wisdom and experience.
The best predictor of relative fund performance is the expense ratio.
Being one of the first to discover a strategy that beats the market is what will buy you a yacht, not copying the strategy after its already known.
The efficient market believer doesnt say that there are not undervalued companies on the market, just that it doesnt pay to go looking for them.
Stocks tend to fail at the worst possible times, such as during recessions when your labour capital can be subject to increased risk.
Active management is the triumph of hype, hope and marketing over wisdom and experience.
March 30, 2015
excellent. Once again, Swedroe makes the case against active investing, a costly unproductive pursuit. Instead, the wise investor should create a diversified investment plan and allocate funds where expected returns are highest and risk is lowest while keeping expenses low. Quick read but thorough in its coverage.
January 21, 2015
Another home run for Swedroe
Cuts thru the marketing hype from advisors. My guess is advisors won't be recommending this to their clients since it would kill their commissions. For all of us "non-advisors" a must read. Ignore at your peril!
Cuts thru the marketing hype from advisors. My guess is advisors won't be recommending this to their clients since it would kill their commissions. For all of us "non-advisors" a must read. Ignore at your peril!
March 7, 2015
A quick read. While the book may be short, it is long on content. The authors provide a compelling argument for why passive investing makes even more sense today and will increase in importance over time. Highly recommended.
February 10, 2015
Good introduction to factor based investing.
December 30, 2016
Quick, easy read but some profound insights. Reminder of how hard it is for professional investors to outperform the market.
Read
January 10, 2017Great
Great. Concise. This book took an opaque complicated topic and made it accessible. Actively managed funds are for suckers. Enjoy!
Great. Concise. This book took an opaque complicated topic and made it accessible. Actively managed funds are for suckers. Enjoy!
March 12, 2022
This book makes strong arguments for investing in low-cost mutual funds and ETFs rather than trying to select individual stocks yourself.
Displaying 1 - 23 of 23 reviews