--------|-------------|-----------|
| Market (beta) | [X]% | No — market did this |
| Sector allocation | [X]% | Yes — my sector bets |
| Stock selection | [X]% | Yes — my picks within sectors |
| Interaction | [X]% | Yes — consistency |
| TOTAL | [X]% | |
How much of my return came from SKILL vs. MARKET?
## Step 2: Identify your edge (and your leaks)
Based on the attribution analysis above, answer these questions:
MY EDGE:
- Which component contributed the most positive alpha?
- Is this consistent over multiple periods, or was this period an outlier?
- Which specific sectors/positions drove the most positive selection effect?
MY LEAKS:
- Which component dragged performance the most?
- Which sectors/positions were the biggest detractors?
- Am I systematically bad at any particular thing? (e.g., always overweight the wrong sector, or always pick the worst stock in a good sector)
ALLOCATION EFFICIENCY:
- My best ideas (top 3 positions by conviction): did they have the highest weights?
- My worst positions: were they sized appropriately (small) or did they hurt because they were too large?
- Portfolio concentration: am I diversified enough, or am I a closet index fund?
The honest answer: Am I generating real alpha, or am I a leveraged beta play?
## Step 3: Build the improvement plan
Based on the attribution and edge analysis, create an improvement plan:
DOUBLE DOWN:
- What's working? How can I do more of it?
- Should I increase concentration in my highest-conviction, best-performing areas?
FIX THE LEAKS:
- For each identified leak, what's the specific fix?
- If sector allocation is negative → should I go sector-neutral and focus on stock picking?
- If stock selection is negative in certain sectors → should I avoid those sectors entirely?
PROCESS CHANGES:
- Based on the data, what ONE change would have the biggest impact on my next-period returns?
- What should I STOP doing?
- What should I START doing?
- What should I CONTINUE doing?
Create a scorecard I can fill out at the end of next period to track if these changes helped.
## The system in practice
**Monthly:** Run Step 1 on monthly returns. Track the attribution components over time.
**Quarterly:** Run Steps 2 and 3 for a deeper review. Adjust process.
**The insight:** Most traders who think they have an edge in stock picking actually have an edge in sector timing (or vice versa). The attribution tells you the truth.
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*Next issue: The weekend research sprint that prepares you for the week ahead*