📈ALPHA VS BETA

As 2022 comes to an end and a new chapter begins we need to focus on what is working. What worked in the past will not work in the current environment. We are going through a revaluation of risk assets. That is very different than most people in the past decade of investing have seen. Due to the Feds actions we are no longer in a zero interest rate environment. Fed funds rates determines at what rate companies and consumers borrow. It is very easy to run a company and try new ideas if your rate on debt is significantly low. Once interest rate rises and the cost of borrow goes up companies interest payments increase. This will lead to a repricing of highly levered companies. Great examples would be the EV space RIVN and LCID are not in trouble due to the product being subpar. The cost of running their business have gone up exponentially. (see below)

During these times it’s important to focus on companies that have an edge versus those that were going up based upon the fed’s zero interest rate policy. We are entering a period of Alpha. Alpha is a term used in investing to describe a stocks ability to beat the market. It’s finding an edge. Alpha is also often referred to as “excess return” versus the benchmark. In most cases the benchmark is the SP500. In an expanding economy Alpha can be used in conjunction with Beta. Beta measures the broad market's overall volatility or risk. For example if the Beta of the SP500 is 1 and TSLA has a Beta of 2 then TSLA will outperform. This was exactly what happened in 2020-2021 and why several newer traders outperformed. They simply levered the highest Beta financial instruments. Whether that was crypto or tech stocks it did not matter. Now in a contracting or slowing economy Beta is counterintuitive to use with Alpha. We are levered to companies that are having a massive increase in expenses. Not to mention we are competing with 4% two year treasury for investment dollars. Focus on Alpha. Focus on the edge. This is what we will chase in 2023.

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Wishing Everyone Massive Success in 2023 🍾