Should you be a Big fish in a small pond or a Small fish in a Big pond?

Pick the latter.

But why?

Because of Alpha and Beta… But, let me explain: 

Alpha (skill metric) – Alpha is traditionally your individual performance benchmarked against market indices. It is calculated by subtracting the benchmark return from the portfolio’s return.  A positive alpha indicates that the portfolio outperformed the benchmark, while a negative alpha indicates underperformance. It represents the edge you can create by yourself as an investor. 

This concept is easily digested in its practical sense, but its theoretical abstraction can also be applied to decision making.

Beta (volatility metric) – Beta measures the portfolio’s volatility in relation to the market. It’s the idea of the market itself against other measures. A beta of 1 indicates that the portfolio’s volatility is the same as the market, while a beta of less than 1 indicates lower volatility while a beta of greater than 1 indicates higher volatility. The higher the beta (generally) the higher the volatility. 

So, what about these concepts can be used to make better decisions?

Well, here’s why they matter: 

Maximizing alpha can only get you so far as there are invisible beta forces guiding your overall performance. No matter how hard you row upstream, if you have rapids, you’re going to get pushed downstream. You can be the best in a dying industry, but in a binary extinction event, it won’t matter. 

This is to say that the games you play matter a lot more than how good you are at them. 

When you play the best games you’re exposed to industry talent otherwise inaccessible. It’s impossible not to learn through osmosis. (Even if you think you can’t keep up). A mediocre performance in an environment with rising beta will far outweigh the losses for mediocre individual performance. 

It may be uncomfortable, but it’s important to embrace uncertainty and be the small fish. Resting on your laurels or going for an ego play represents the alternative. 

As with everything, the framework needs to be determined by you where appropriate (sorry).

In his talk with the Wharton PE/VC Club, Chamath says:

“Alpha is Obvious when rates are not zero, but you get pure beta when rates are zero”

Alpha is emphasized in economic downturns where you can discern who is knowledgeable and who isn’t. Sign up for our Newsletter below to be one of the knowledgeable ones! (but I know you already are )