My Approach to Investment Alpha: Wanting More, Knowing My Limits

A note from the author: This is the fifth article in a series where I aim to share my personal financial journey and the decision-making framework I use. I am not a financial advisor, and these are reflections on my own choices, values, and rationale, not recommendations for others. I hope that by sharing my thought process, I might offer a different viewpoint or spark useful reflection and discussion for those navigating similar paths. I welcome alternative, including contradictory, perspectives. If you find any factual errors in this article, I would appreciate it if you could point them out.

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In the previous articles, we established my foundational savings philosophy , my core investment principle of only investing in what I understand , and looked at a case study of an asset class I avoid—real estate—where my decision was based on a different set of practical and financial filters. The last piece detailed my evolution as an equity investor and the path that led me to my current approach.

Having covered my overall approach, this article delves into a specific aspect of investment returns: my personal take on the quest for ‘alpha’—balancing the natural desire for more with an honest awareness of my own limitations.

If you’re new here, I recommend starting from the beginning to get the full context. You can find all the articles in this series on this page:

https://chiranjeevsingh.me/tag/myfinances

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We often hear about the quest for “alpha” in the investment world. Simply put, alpha refers to earning a return on your investments that is above a certain benchmark or threshold – essentially, doing better than the average market performance.

The Natural Desire for Alpha: Of Course, I Want It!

Am I interested in generating alpha on my investments? Why wouldn’t I be? I, like most people, appreciate the value of money. I would certainly prefer to have more rather than less, especially if that “more” could be achieved without me personally having to expend enormous effort in forecasting or picking specific winners. So yes, the desire to achieve alpha is definitely there. This desire is common, and it’s what often drives many investment decisions.

The Common Chase: How Many People Pursue Alpha

This desire for alpha leads many people to actively try and outperform the market. You see this when investors pour money into specific sectoral funds (believing a particular industry like tech or healthcare will boom), individual “hot” stocks, curated baskets of stocks, or even funds focused on a specific country they believe is poised for exceptional growth. The underlying belief is that their chosen investment – whether it’s a particular sector, stock, or region – will be the one to generate that coveted extra return.

My Reality Check: The “Awareness of My Ignorance”

Here’s where my personal approach diverges. While I share the desire for alpha, I am deeply convinced that I do not personally know how to achieve it through such specific selections. There are countless complex and interconnected factors that play a role in determining the future returns of a particular stock, a basket of stocks, or even a specific market. I simply cannot predict these with any degree of confidence.

In my assessment, I am so acutely aware of how much I don’t know – my “awareness of my ignorance,” if you will – that I cannot bring myself to invest my capital based on my own predictions about these specific opportunities. My understanding of my own limitations is what holds me back.

Delegating the Alpha Hunt: My Trust in an Expert

This profound awareness of my own limitations doesn’t mean I give up on the possibility of alpha. Instead, it leads me to place my complete faith in a chosen expert who, I believe, is equipped to navigate this complexity. As I’ve discussed in a previous article, this is why I specifically chose Parag Parikh Financial Advisory Services (PPFAS) for managing my equity investments.

My thinking is this: if the fund manager at PPFAS believes a particular stock, sector, or market is likely to do well, they will make the decision to invest there. If they don’t see a favorable opportunity, they won’t. They are the professionals whose job it is to make these nuanced calls.

What About Missed Opportunities? Can I Do Better?

Of course, it’s entirely possible that even a skilled fund manager might miss out on some high-flying opportunities. No one can catch every winner. But when that thought arises, I ask myself: If my fund manager misses an opportunity, what am I going to do? Believe that I can spot those missed chances better than they can?

Again, my honest answer is no. I don’t believe I have the capability to effectively evaluate the multitude of factors that impact the performance of a particular stock or sector. Trying to second-guess a professional, based on my part-time observations or hunches, seems illogical for me.

My Stance: Relishing Alpha, But Not Pursuing It Myself

So, while I would certainly relish having an alpha return on my investments, I’ve made a conscious decision that I do not personally pursue it by trying to pick specific hot sectors or stocks. My role, as I see it, is to choose a fund manager and an investment philosophy that I understand and trust.

If my chosen fund manager delivers alpha through their expertise and diligent process, that’s a wonderful outcome, and I’ll be very pleased. If they don’t, and my returns are more in line with the broader market (or whatever their stated objective is), then that’s how it is. I accept that outcome because my peace of mind comes from knowing I’ve made a rational decision based on my own capabilities and limitations, rather than from anxiously trying to outsmart a market I know I don’t fully understand.

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What’s Coming Next

Having covered my philosophy on returns, the series will now shift to real-world case studies where my principles and emotions were put to the test.

In the next article, I’ll share the candid story of “My Experience with Airtel Stock”. It’s a transparent look at a specific investment where I reflect on my initial decisions, which were based more on intuition than analysis, and the insights I gained about my own emotional responses.

Following that, we’ll explore another practical example in “My ‘Process vs. Outcome’ Story,” which for me, was a powerful experience that reinforced my conviction in focusing on a sound decision-making process over getting fixated on any single outcome.

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