Chapter 2. Generating Alpha
In the financial investing world, there is an ongoing discussion about something called alpha profits. When investors generate alpha profits, that means they deliver higher returns on their investments than what the market rate of return would normally be, given the riskiness of those investments. Typically, in order to earn higher rates of return, an investor needs to take on higher levels of risk.
However, sometimes investors can earn higher rates of return on lower-risk investments. In these cases, it must be the personal skill of the investors that accounts for the extra return. We all know of investors and fund managers who generate above-market returns year over year for many years running, so their performance is not just luck. Those people have investing and trading strategies that generate alpha profits of 2 to 4 percent above the market rate and sometimes more.
It is also possible for companies to generate profit margins that are 2 to 4 percent (and sometimes more) above the market average for their product or service. These companies have business models that generate alpha business profits. Such companies may or may not have totally new products, but they always find ways to wrap their products in value-added services so that they appeal strongly to customers in targeted market segments.
VALUE-ADDED SERVICES AND ENTREPRENEURIAL EMPLOYEES GENERATE ALPHA
Here's an example based on my experience to illustrate how a company can focus on certain target ...