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

[rb250660]

You can be whoever you want. That's what is great about life right!?

 

[DeepState]

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!!

This is actually a very important point (not kidding). Can you please expand on what you are thinking here?

 

[rb250660]

Seriously though, if the risk to the downside is managed anything is possible.

On the other hand I look to diversify by trading multiple strategies that are not correlated to each other. None of them hold any more than 10 positions and certainly trade different time frames. I think beyond that you are wasting you capital if you think you are diversifying. You'll find that even with 10 positions if mining for example is going off, half of your holdings are probably mining stocks, why hold another 10?

My comments of course depend on your trading style.

 

[galumay]

and the whole loop tightens with vast outcomes for a few and a wide and silent group for whom it did not work out.

Yep, i got the analogy! I think that Buffett is right both ways, as long as you understand the context. He was pointing out the 20 slots thing to try to get people to more carefully consider where and how they allocate capital, I think he would be the first to concede that he and Charlie are outliers and what he recommends others doing very often is entirely different to what they have done. I also think his enthusiasm for the Bogle approach is based on his conclusion that the vast majority of people are psychologically unsuited to active investment - in which case a highly diversified portfolio (like index trackers), works best.

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.

Around 15-20 seems to suit me, I think it would be variable based on how much time I am able and prepared to devote to active portfolio management - currently that number fits in with the rest of my life activities.

While I appreciate and understand your comments about the heuristics that lead to people to believe that the best results are achieved with "hyper concentrated portfolios", the opposite is also the case with many similar biases leading to people frequently and loudly arguing that hyper diversification is essential and anything less is a path to ruin! Like most things in life, the reality probably lies somewhere in the middle, some of the time, for some people!

 

[DeepState]

Yep. So each of your individual trading strategies is run pretty tight....but you run several. So, at least in my book, you're not running a portfolio of 1-3 stocks. Perfectly legit.

Agree also with the management of downside risk. Rule #1. Which is the reason behind my question to Barney.

I understand that a position is being advocated by T/A s to deploy the same quantum of capital, that had been invested in some equity portfolio that is meaningful to the person, into a very small number. On the face of it, subject to revelation of why this is only really a part of a wider - diversified - arrangement, that's got some hairs on it.

If the assets are just punting BS loose change, then do whatever...it doesn't matter....but the advice should probably state that the situation is such that the proposition doesn't matter anyway.

 

[OmegaTrader]

I think the answer to the debate is what ever gets the best results in the long term.

Those results should take into account return, risk, availability of opportunities and time taken for the trade/investment return to be realised.

The strategy that has the best return measured at the same time frame for the given risk and appropriate for your capital level.

Easy to say after the fact, finding out the answers is the hard part. Ones personal situation often tends to cloud the situation as well to fit in with the ingrained lifestyle and attitudes/beliefs.


The rest is hubris and the proverbial gorilla inside beating the chest.

my limited two cents

 

[barney]

This is actually a very important point (not kidding). Can you please expand on what you are thinking here?

Hi DS .... I really believe that every Trader's personal circumstances dictate their bias as to what is the "best" way to trade/invest.

"Best" of course is a relative term ..... So many variables have to be considered .... My circumstances are likely so far detached from what yours or tech's may be that I don't think anyone can discount the possibility that "all" our systems might still be both profitable and "correct" for our own personal circumstances (repeating myself, sorry)

I think Galumay's point that you can skin a cat in many different ways is the best way to describe it .....

Normally I would feel sorry for the cat, but trading/Investing makes the cat fair game ... lol

I really think that the potential direction that this thread could end up taking is likely a non event based on the fact that some people like "Tabbies" and others like Burmese/Himalayan crosses Cheers.

 

[galumay]

I think the answer to the debate is what ever gets the best results in the long term.

I am going to be contrary here, I dont think you can say that, because as DS points out its very likely the very best outlier results will come from an ultra concentrated portfolio - in fact logically the best result will come from a single holding - whatever company is going to have the highest % increase in share price over the time period.

The point is to be very wary of any absolutes, whenever I hear someone saying, "there is only one way..." or "the best way is certainly..." I become wary!

 

[DeepState]

Hi DS .... I really believe that every Trader's personal circumstances dictate their bias as to what is the "best" way to trade/invest.

"Best" of course is a relative term ..... So many variables have to be considered .... My circumstances are likely so far detached from what yours or tech's may be that I don't think anyone can discount the possibility that "all" our systems might still be both profitable and "correct" for our own personal circumstances (repeating myself, sorry)

I think Galumay's point that you can skin a cat in many different ways is the best way to describe it .....

Normally I would feel sorry for the cat, but trading/Investing makes the cat fair game ... lol

I really think that the potential direction that this thread could end up taking is likely a non event based on the fact that some people like "Tabbies" and others like Burmese/Himalayan crosses Cheers.

Thanks. There certainly is much room for wiggle in this, between the extremes of one stock and 2,000 stock portfolios.

I was curious about your time frame assertion. I think it matters, but wanted to wait for you first.

I think "best" is: doing whatever has the highest chance of getting what you want (taking in to account the pain and suffering for not getting it). This includes consideration of how likely you are to survive the journey to that point in addition to your skills and aptitudes. If your neural net can handle it, you can also allow for 'fun' in this journey...not kidding.

There are situations where a single stock portfolio makes sense. They are uncommon. These would include options market makers. Traders sometimes get in to the zone on a single futures contract...which is where this gets interesting.

If you used to punt around in a portfolio of 20 stocks and now argue to deploy that capital in to just 2 stocks, the trade-offs in skills required to achieve this outcome are the stuff of fiction if that somehow is to be regarded as even best-er-er.

However, it is entirely viable if you cut your portfolio risks in a way which accommodates for the concentration now being taken. If you do this, on the basis that deep focus gives you greater edge (and may even help you hold through tough spots because knowledge gives you comfort and confidence), all is good.

If the outcomes just aren't material to you, as previously mentioned, then who cares - the alternatives basically merge. But if they are then it takes a special idea of what constitutes best to suggest a 2 stock portfolio is a responsible way forward for the prior assets. I suspect that T/As account really doesn't matter that much for him. In which case, do whatever makes you happy...just don't take it as useful general advice for those who's situation requires more careful consideration.

 

[tech/a]

Seem to have hit a raw nerve
So we have two no's and 1 interested
To the question of course

 

[galumay]

I dont think you have hit a raw nerve, its healthy discussion isnt it?
I think everyone is interested, otherwise why would we engage?

 

[Quant]

If your diversified portfolio doesnt beat the total return index why do you even bother with a portfolio . Many times i think diversifying stock holdings isnt reducing risk , its likely just burying it . If you arent proactive managing risk why dont you just do it the easy way with an index etf/derivative

 

[galumay]

If your diversified portfolio doesnt beat the total return index why do you even bother with a portfolio .

What leads you to the conclusion that some/all posters in the thread are not going to return better than the relevant index with their portfolios?

If you arent proactive managing risk why dont you just do it the easy way with an index etf/derivative

I dont quite understand what you mean by this statement. I guess there would be many varying opinons about exactly what risk is and how/if it should be managed. Not sure how you link that with passive index investing. (which has its own specific risks IMO.)

 

[OmegaTrader]

I am going to be contrary here, I dont think you can say that, because as DS points out its very likely the very best outlier results will come from an ultra concentrated portfolio - in fact logically the best result will come from a single holding - whatever company is going to have the highest % increase in share price over the time period.

The point is to be very wary of any absolutes, whenever I hear someone saying, "there is only one way..." or "the best way is certainly..." I become wary!

If you are not trying to get the best results what are you trying to do???

hahahah

Read what I said.

Proof is in the pudding end of story

If you have two strategies. The same risk, the same return per year,the same time spent per week and both applicable to your amount of capital with abundant opportunities available at your level of capital.

One has 17% p.a return trading one asset and one has 12% p.a return trading 20 assets.

17%>12%

Now if the 17% was day trading and 12% was buy and hold and you work full-time, then that is a different story. Now time and opportunity cost of time and lifestyle choices come into play.

However ceteris paribus 17% is always better than 12%

That is what I was referring to. You could switch the scenario as well etc.

If an investor/trader has the experience and toolbox to employ multiple strategies. He/she just employs the best strategy .

He does not think oh I will take 12 % instead of 17% just because Ideologically I like diversification and vice versa of course. Oh statistically holding one stock will show this or that. Just go for the meat.

What works for him to get the best risk return profile. What works to make the most money in the long term for him. He cares about money not ideologies.



It never changes, 17% will never be better than 12% no matter how hard one beats their chest.

 

[tech/a]

If your diversified portfolio doesnt beat the total return index why do you even bother with a portfolio . Many times i think diversifying stock holdings isnt reducing risk , its likely just burying it . If you arent proactive managing risk why dont you just do it the easy way with an index etf/derivative

Yup

 

[galumay]

Read what I said.

I could say the same to you! You have basically completely failed to comprehend the point I was making about your statement that,

"I think the answer to the debate is what ever gets the best results in the long term."

Maybe I didnt explain it clearly enough.

Your response just seems to introduce more unsupportable generalisations. In fact people are continually trading higher returns for the perception of reduced risk. Ask anyone who practices portfolio rebalancing or chooses an asset class like ETF's.

If you are not trying to get the best results what are you trying to do???

I realise the best results are beyond my skillset, picking the company that will have the biggest increase in share price over the next 20 years is not something I have any confidence in, so i trade off the best possible return for less risk and accept that I will make a lower return than the absolute outliers.

 

[barney]

Thanks. There certainly is much room for wiggle in this, between the extremes of one stock and 2,000 stock portfolios.

I was curious about your time frame assertion. I think it matters, but wanted to wait for you first.

I suspect that T/As account really doesn't matter that much for him. In which case, do whatever makes you happy...just don't take it as useful general advice for those who's situation requires more careful consideration.

DS, I totally respect your opinions and to be honest, I suspect you are likely so far advanced of my own meager trading exploits that I perhaps shouldn't even be conversing with you

In saying that, i also totally understand what tech/a is on about in his initial post ...... Tech runs a very successful business and (I assume) trades as a pastime to create a small passive income ...(Much like my $1 punting system I use on the TAB to pass the time when the markets aren't open lol) ... Disclaimer ... I generally lose over the medium/longer term

That being the case, every persons reason for trading, and their strategy for trading is totally independent of someone else s situation .....

My assumption ... Tech really doesn't even need to trade ... He probably does it because a) He can ... and b) He has proven he can!!

Personally, I still trade because I lost a small fortune about 12 years ago and I am determined to "make it up" to my family for screwing up so badly!! .... Last 3 years using a similar strategy to what tech suggested in post 1, lets just say my results have been ...... pretty good

The interesting thing is ..... that Tech's newfound plan in post 1 are very similar to my own realization even though we are living totally different worlds ........

I really have no idea of what I am trying to get at, other than the skinned cat scenario It's late and I'm babbling ... hopefully you get my drift Cheers.

 

[DeepState]

It never changes, 17% will never be better than 12% no matter how hard one beats their chest.

...that's unless the risk in the 17% asset is high beyond a certain point. If, some time in the future, cash was at 12%pa and this other asset was a stock/portfolio with (a properly assessed) 17% expected return in any given year but risk (say std devn) of ~35+%pa, you'd actually do worse investing in the higher expected return asset or portfolio of assets.

This happens because a loss of 10% requires a higher gain of around 11% to make up for it. This feature makes a full investment in to a risk asset produce a lower long term return than might be imagined from just saying it should surely be the 17% figure, extrapolated forever.

This is not chest beating, but an example that a reduction in diversity really does come at a cost. That's fine to bear if the stocks you own have a high enough expected return to make up for it and the discomfort/risk-to-mission for doing so. As mentioned before, it can be argued that concentration increases your expected return...but will it do it by enough?

 

[galumay]

DS, I totally respect your opinions and to be honest, I suspect you are likely so far advanced of my own meager trading exploits that I perhaps shouldn't even be conversing with you

dont sell yourself short mate, while I totally agree with your opinion of DS, thats exactly why we should be conversing with him - and be grateful he shares his views and thoughts.

Its late here too, and I should know better than to get into these sort of in depth discussions while trying to watch the rugby! (Go the Sunwolves!)

Its invaluable to have ones ideas and thoughts challenged by those who think differently - sometimes I suspect my desire to learn what people are thinking and why comes across as patronising or arrogant, but that is not my intent.

Anyway, back to the rugby, and goodnight!

 

[skyQuake]

tech/a are you advocating simply kelly betting a small cap momo system?
And is the single digit number of stocks a function of low signal generation rather than an enforced rule