Sometimes friends like to discuss the general market conditions. Recently one of my mates commented that things must be great given the prevailing booming market. I concurred, agreeing the Fund was performing well, but I also mentioned I’m not terribly excited by it all, because we tend to focus on process more than outcomes. The considered (and very practical response) was “that’s all well and good, BUT, you live off outcomes, you can’t live off process.”

This is entirely true, and it is the reason why investment in our Fund is not suitable for those investors who would rely on the Fund’s distributions to meet their day-to-day expenses. It is why we suggest our Fund is suitable only for those investors who have at least a five year time horizon, and why we discourage investors from frequently monitoring the Fund’s performance. Invest with Alluvium because you like our process (and have the fortitude to stick with it) for the outcomes will take care of themselves over the course of time.

“Ultimately, of course, you want people with good process and good outcomes, but I’d rather have somebody working for me who had a good process and a bad outcome in a given year that somebody with a bad process and good outcome.” – Dan Loeb

And then, when catching up with another mate, who happens to be a like-minded value investing proponent, I was discussing the benefits of volatility, the “time arbitrage” edge, and the fact that a common trait amongst our investing mentors is that they all embrace volatility.

“Volatility is the price you pay for performance.” – Samantha McLemore

This led to a discussion of our university days, and the preaching of the Efficient Market Hypothesis (EMH) – a concept that much of traditional asset allocation is founded upon. EMH is premised on there being “no free lunch”, ie all information is priced in the markets, so any excess return is only achievable by assuming extra risk.

“If markets were efficient, I’d be a beggar with a tin cup.” – Warren Buffett

However, for markets to be efficient they must be constantly analysed. But why on earth would anyone analyse a market that is efficient? After all, efficient markets mean that excess returns (without extra risk) are not achievable. So, where is the incentive? No rational person would bother. And if markets are not analysed, then how can all information be priced in, and therefore how can they be efficient? It is circular argument and a contradictory thesis.

“The efficient-market-believing professor takes a walk with a student. “Isn’t that a $10 bill lying on the ground” asks the student. “No, it can’t be a $10 bill,” answers the professor. “if it were, someone would have picked it up by now”. The professor walks away, and the student picks it up and has a beer.” – Howard Marks

So, what are the conclusions from these two conversations: focus on your investment manager’s process, not their outcomes, embrace volatility, have a long term investment horizon, and if you see a $10 bill on the ground, and it happens to be real, go and treat yourself to a beer.


This article has been prepared solely for the purpose of providing general information about Alluvium Asset Management Pty Ltd (ABN 69 143 914 930) which holds an Australian Financial Services Licence Number 476067 (“Alluvium”), and the Alluvium Global Fund, which is managed by Alluvium. The article has been compiled in good faith in relation to the activities of Alluvium. Alluvium believes the statements contained are reliable, however no representation is made as to the completeness or accuracy of the information it contains. In particular, you should be aware that this information may be incomplete, may contain errors or may have become out of date. Use of this article is entirely at your sole risk. Reproduction or distribution of this article without written permission is prohibited. The information is general in nature and does not take into account your personal circumstances, financial needs or objectives. Statements contained are not general advice or personal advice and should not be considered as a recommendation in relation to an investment in the Fund or any company referred to, or that an investment in the Fund or any company named in the article is a suitable investment for any specific person. Further, it is likely that at the time this article is published, Alluvium’s and/or the Fund’s position or opinion in any identified company may well be different to that at the time of writing. You should seek independent financial advice and read the relevant disclosure document prior to acquiring a financial product. Alluvium, its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information contained in this article, or for any negligent misstatements, errors or omissions.