The Portfolio MYTH-----Do you need to change your thinking?

[tech/a]

Its becoming more recognised, I've seen it mentioned by a few now.

While portfolios are designed to minimize risk they certainly don't maximize profit.
I think this is true for Technical/Fundamental/and Systematic traders.

I've changed the way I trade stock. Its taken 8 mths.

In some part as a throw back from trading futures for a few years now.
Individual issues develop a life of their own. Take enough time to study it and you'll see its consistent. So what's changed my thinking.

(1) I find it easier to anticipate the movements of one/two max issues--- than 10 or 20.
(2) I can make decisions quicker for entry/exit and trade management.
(3) I can take a larger risk on one/two max--- rather than 10 and get a better bang for buck.

( This has taken time to perfect but I have had up to 60% of my allocated funds (to small caps) in one issue during a day of trading. Yes I hit and run but often still hold the original.
Just one part of a vastly altered trading plan---designed specifically to trade 1 or 2 issues).

(4) I can at times take on far more risk while still minimizing longer term (O/N) risk.
again better bang for buck.

(5) Much easier to manage.
(6) I think its a necessity if you wish to adjust with the times.
(7) There are opportunities everywhere and they are black and white--they trigger or fail
very quickly and with the risk mitigation skills learned while trading the DAX/FTSE they are
easy to trade---more reliable---slower!!--than Futures.
(8) Many of the runs are long and returning well over 5 sometimes over 10R.
(9) I rarely drop more than 1-2% on a losing trade and only 2 times have I dropped my initial risk in its entirety .
(10) Theories are easier tested. And prospects quickly found.

(11) Its MORE PROFITABLE (On money invested)

(12) Lastly its bought the FUN BACK!

 

[galumay]

It makes sense for those reasons for a trader, I believe there is some cross over for investors too.
From an investing point of view it avoids di-worsification and requires less effort and time to fully understand the businesses I am invested in.
The big commonality is higher returns if the decision making is sound.
I suspect its highly dependent on one's strategies and processes to support them.

I have reduced the number of businesses I am invested in and consolidated my portfolios to some extent. I am mindful of Buffett's suggestion that we treat it like a punch card,

"I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about."

 

[DeepState]

If you are awesome, you don't need diversification. Spreading yourself too thin can reduce the degree to which you are awesome. That's true.

The average SMSF portfolio has less than 10 stocks in it. I suppose most of us are either awesome (everyone is special!) or have very limited bandwidth (everyone has ADHD), or have no idea what we are doing. ... It's hard to say which.... or is it?

If fun is your objective, do what makes you happy!

Now, please remind me, how many stocks does Berkshire hold? Or, for traders, Rennaisance Capital?

 

[galumay]

Now, please remind me, how many stocks does Berkshire hold?

I believe Warren & Charlie have both made the point aboiut how hard it gets when you are as incredibly successful as they have been. Nothing much that is true for the rest of us really makes sense on the sort of scale they have to operate on!

or have no idea what we are doing. ..

Thats the one that resonates with me!

 

[tech/a]

If fun is your objective

Fun is a bi product of doing something well.
Anything
Business
Sport
Marriage
Friendships.

 

[DeepState]

I believe Warren & Charlie have both made the point aboiut how hard it gets when you are as incredibly successful as they have been. Nothing much that is true for the rest of us really makes sense on the sort of scale they have to operate on

How about what they were doing, say, 40 years ago....(accessable via Chairmam's letters via BRK site if interested). Anyway, it's rather more than 10. And that's when they had a lot more flex than today.

 

[barney]

I've changed the way I trade stock. Its taken 8 mths.

( This has taken time to perfect but I have had up to 60% of my allocated funds (to small caps) in one issue during a day of trading. designed specifically to trade 1 or 2 issues).

Lastly its bought the FUN BACK!

Its interesting to hear you think this way tech and it reinforces what I finally discovered about 3 years ago. Your new rules in Post 1 are very similar to what turned my trading from "I probably should give this up" ... to, "I'm doing OK" .....

As you know, when taxation becomes a consideration, you trading is improving lol ....

As for the fun aspect .... I'm not quite to the fun stage yet but I understand your sentiment .... i am hoping for "fun" to develop over the next couple of years

 

[DeepState]

In the land of ASF, everyone had enough but there was a debate about the myth of portfolio diversification that needed to be settled. The population of 2000 has equal skill but there are differing views on the matter of diversification. The town is split in to two camps. Camp Awesome held portfolios which had half of the effective diversification of Camp Timid. Think of this as equally weighted portfolios of 10 stocks vs equally weighted portfolios of 20 stocks where the stocks are similar in characteristics individually.

After a year, the results are in. Of the top 10 Hall of Fame list, nine are from Camp Awesome and only one is from Camp Timid. They all do book and speaking tours and the township became convinced that concentrated portfolio management was definitely the way to go as the very best investors overwhelmingly preached it.

One curious kid, a child of Camp Timid, walked around the town a month later and was looking at a huddled mass of unfortunates eating cat food. This was strange because the town of ASF had enough only a little while ago. Crime was low in ASF, so he approached them. Nine out of ten of them, it turns out, were from Camp Awesome. No one asks them to share their thoughts on the matter of portfolio diversification though and their story goes unheard.

Meanwhile, the bulk of people in Camp Timid go on to live their quiet lives with some being tempted to move to concentrated portfolios by spruikers of how that it how they got so rich. Those who were Awesome remained forever convinced that this is the way to go because the super-stars almost always invest that way.....

The child never developed a sense for investments. He went on to create a cat food company and became very wealthy.

 

[galumay]

How about what they were doing, say, 40 years ago....(accessable via Chairmam's letters via BRK site if interested). Anyway, it's rather more than 10. And that's when they had a lot more flex than today.

We are probably dragging the Duck's thread OT a bit, but...two things, he said 20, which is rather more than 10, and he wasnt saying thats what BRK did, he was advising groups of college students about the approach they might take to investing.

EDIT - We wrote the last 2 posts concurrently, lovely story DS, the concluding line is gold! Prompts me to repost one of the best quotes by a recently departed mate of mine, I had been making a long winded and intense point in debate within a critical negotiation, and concluded by making the point that there is more than one way to skin a cat, my old mate John looked up, rubbed his eyes as if waking from a stupor (induced by my rambling), and noted, "Yep, and the cat doesnt like any of them."

 

[tech/a]

The child never developed a sense for investments
And he probably doesn't learn Morse code either.

Poor analogy D/S

Would you feel as strongly if a futures trader
Argued that trading futures (1 or 2) are potentially
More profitable and easier than trading a portfolio of
Stocks. I'd agree with him.

I suggest those interested investigate the idea which is not
Mine alone ----- further.

Buffett became filthy rich from 1 great company and one
great decision.
Berkshire Hathaway.

20 and 10 is still quite diversified portfolios
2 v 20 is vastly different in content and management
So they should be.

Black and White really

 

[DeepState]

We are probably dragging the Duck's thread OT a bit, but...two things, he said 20, which is rather more than 10, and he wasnt saying thats what BRK did, he was advising groups of college students about the approach they might take to investing.

Hi Galumay

In the world of stocks, if the assets are material to you, I don't have any problem with something like 10-25 stocks, depending on what they are. T/A did not advocate 10-20, he said:

(1) I find it easier to anticipate the movements of one/two max issues--- than 10 or 20.
(2) I can make decisions quicker for entry/exit and trade management.
(3) I can take a larger risk on one/two max--- rather than 10 and get a better bang for buck.

So, going into ultra concentrated holdings. He never mentioned BRK, but I raised it because Buffett is often quoted on the matter. And yet, he held portfolios which were more diverse that many might think when mentioning 'diworsification' amongst many wise things he has said. Interestingly, Buffett says Jack Bogle is truly the awesome one in the latest annual. Bogle founded Vanguard...the doyen of diversification.

So, this concept of hyper concentrated portfolios keeps coming up and it keeps coming up because the best outcomes are often derived from it. Whilst often expressed as skill, it is a statistical matter that they will be at the outliers and it will appear like skill to be emulated because the spoils go to the victors...and cat food eaters don't write books. The natural outcome, if people are not aware of 'availability bias', is to believe in concentrated portfolios and the whole loop tightens with vast outcomes for a few and a wide and silent group for whom it did not work out.

EDIT - We wrote the last 2 posts concurrently, lovely story DS, the concluding line is gold! Prompts me to repost one of the best quotes by a recently departed mate of mine, I had been making a long winded and intense point in debate within a critical negotiation, and concluded by making the point that there is more than one way to skin a cat, my old mate John looked up, rubbed his eyes as if waking from a stupor (induced by my rambling), and noted, "Yep, and the cat doesnt like any of them."

Nice one. Given two options, find the third!

 

[rb250660]

I take it you are talking about discretionary trading right?

I'd hate to have 60% of total funds in some POS low cap stock that suddenly goes into a trading halt to raise capital after a recent big break out. So typical! Or someone decides to fly planes into building while you were sleeping.

 

[DeepState]

The child never developed a sense for investments
And he probably doesn't learn Morse code either.

Actually, the kid did learn morse code.

Poor analogy D/S

How so? Perhaps the town isn't actually called ASF?

Do the extreme outcomes from investments not come from those who take the greatest risks more often than not? Does extreme upside not get celebrated and emulated?

Would you feel as strongly if a futures trader
Argued that trading futures (1 or 2) are potentially
More profitable and easier than trading a portfolio of
Stocks. I'd agree with him.

If that was the trader's skill set, that's fine.

It's about risk deployment. If DAX/FTSE is all he knows, that's fine as long as the risks are contained. If he actually knows how to trade a stack of futures markets and has edge in general, it's not such a great idea. He'd be better off deploying risk slightly more broadly.

There is a possible argument, which you have made, that focus increases edge. That's viable. But your edge had better degrade very rapidly to sustain the argument of ultra-concentration. The kind of degradation that would mean a person just can't concentrate on much at all...which makes investing/trading rather dubious.

I suggest those interested investigate the idea which is not
Mine alone ----- further.

Buffett became filthy rich from 1 great company and one
great decision.
Berkshire Hathaway.

You are writing this seriously aren't you. I suggest that those interested might read this statement and consider the efficacy. If not apparently absurd, read again given BRK is essentially an insurance company bolted on to an investment portfolio that can be replicated by a mutual fund whose stock counts would be >20. Ridiculous.

20 and 10 is still quite diversified portfolios
2 v 20 is vastly different in content and management
So they should be.

Black and White reallyView attachment 70491

Yes, I'm sure that it appears black and white. In which case, there is probably a problem somewhere.

 

[tech/a]

You have made an assumption
But at times yes.
If I see something running like a flooded river I'll
Hop on and off in the one day just as I do when
I trade futures.
Nothing irresponsible

 

[tech/a]

I take it you are talking about discretionary trading right?

I'd hate to have 60% of total funds in some POS low cap stock that suddenly goes into a trading halt to raise capital after a recent big break out. So typical! Or someone decides to fly planes into building while you were sleeping.

60% of trading capital not nett worth

 

[rb250660]

I just changed the position sizing on one of my mean reversion strategies to trade 50% of capital on each position. I don't know why I didn't think of this sooner to maximize my gains. Never mind the draw downs. Look at those annual returns! YOLO!

 

[DeepState]

What particular assumption are you referring to Duck of Awesomeness? That's great, like Connor McLeod of the clan McLeod (Highlander). Except he truly was immortal.

 

[rb250660]

60% of trading capital not nett worth

Oh so you diversified????

 

[DeepState]

I just changed the position sizing on one of my mean reversion strategies to trade 50% of capital on each position. I don't know why I didn't think of this sooner to maximize my gains. Never mind the draw downs. Look at those annual returns! YOLO!

Awesome RB. Can I be like you?

 

[barney]

It makes sense for those reasons for a trader, I believe there is some cross over for investors too.

Not sure whether this thread will end well but i think the bottom line is likely related to whether punters are long term "investing" or short/medium term trading ..... big difference!!