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

[barney]

dont sell yourself short mate
Anyway, back to the rugby, and goodnight!

LOL Cheers M8 ... and good luck with the Rugby

 

[OmegaTrader]

...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?

What you can't bring in another strategy out of left field .

If cash is better go in cash.
If long term buy and hold diversification is better diversify.
If trading day trading one futures contract is better , daytrade.

Go where the money is and where you competence is. Each to their own.

That is my point and all I know. Enough arguing I think

goobly goopie goo in my brain

gg

bye

 

[luutzu]

I always thought investing is about buying stocks you figured are selling below its value; sell when you think it's way above its value or when you find a better opportunity.

Don't get cocky and put all your capital into the one or two stocks in case the future turns out badly or you're wrong. Other than that, repeat the first step and diversify into new industry if you can.

So it's either I went to the wrong school or not being paid by the hour to look smart.

 

[howardbandy]

Greetings --

Post # 1 of this thread. Tech/a is correct. End of thread!!

I have this view of trading versus investing.
... Investing. I buy something (always long, never short), call my lawyer, and have instructions for the disposition of that item following my death written into my will.
... Trading. I buy something (or go short), anticipating that I will exit that position sometime. The time might be in hours or days, or perhaps years. But I do not expect to hold it for the remainder of my life. This gives me an incentive to consider in advance what might cause me to exit the position and be prepared to do so.

Re Warren Buffett.
Mr. Buffett is described as being an investor. True, he does buy assets intending to hold them forever. But he acts more like the CEO of a conglomerate corporation than an investor. Consider the market drop in 2009. Mr. Buffett's portfolio (Berkshire Hathaway -- lost more than 50% from previous high equity to low, and took over five years to recover. Holding through drawdowns of that magnitude is an act of faith, not of reason. 1929-32 saw similar drawdowns. It took over 20 years and reconstruction from a world war to recover. What if the investor / trader needed the funds during that period or simply found a better use? True, he made great choices and is wealthy. But in large parts because of randomness and of luck. I do not look to him for guidance or inspiration in trading. Or even in investing.

Best, Howard

 

[craft]

Greetings --

Post # 1 of this thread. Tech/a is correct. End of thread!!

I have this view of trading versus investing.
... Investing. I buy something (always long, never short), call my lawyer, and have instructions for the disposition of that item following my death written into my will.

If you are running a trading business than your money is working capital in that business. To that extent, I don’t have an issue with Tech’s proposition that a business that only concentrates on the most profitable product line at any one time can maximise profit (potential). For me the missing word in his post is potential.


Focusing will flatten and widen the distribution of potential outcomes so yes you can get a great result – but the distribution has two tails not only the upside tail.

How do you make sure you get the top end of the distribution and not the bottom end? Imagine where you may finish in the distribution for example getting caught in some nasty future price gap shock with everything on the line? Just focussing won’t tell you where in the distribution you will end. Diversifying as a strategy also doesn’t tell you where you will end up in that resulting distribution of possible outcomes but it does narrow the distribution thereby eliminating the worst of the bad outcomes.


So focusing opens profit “potential” but at the cost of “actual” downside protection. Perhaps that’s a trade-off that makes sense for a business if you are doing it with your eyes wide open. Especially if the trading capital in that business only represents a small part of your wealth.


But in-between a trading business with minimal wealth tied up in the working capital of that business and Howards definition of investment lies a huge expanse of wealth management/creation options for which the opening post in many instances is not good advice.

 

[galumay]

Post # 1 of this thread. Tech/a is correct. End of thread!!

I can only assume that is some sort of attempt at humour.

I have this view of trading versus investing.

An interesting if rather odd view!

(thats 2 absolute statements already, my radar is on high alert.)

I do not look to him for guidance or inspiration in trading. Or even in investing.

Now, why doesnt that surprise me?!

I think I can see why you have such a polarising effect on people, Howard!

 

[DaveDaGr8]

One of my quotes that i have written down is

"Put all your eggs in one basket and watch the basket".

 

[tech/a]

98% of people do as everyone else does
98% of people achieve as everyone else does.

Being in the 98% is nice and safe a feeling of belonging.

Some of us take every step we can to move away and do things
Differently to the 98%

Ridicule is common place.
I've seen it in all walks of life.
From here
To business
To Property
To ultra events ( sporting )

 

[DeepState]

98% of people do as everyone else does
98% of people achieve as everyone else does.

Being in the 98% is nice and safe a feeling of belonging.

Some of us take every step we can to move away and do things
Differently to the 98%

Ridicule is common place.
I've seen it in all walks of life.
From here
To business
To Property
To ultra events ( sporting )

So are you proposing an extreme process just to be different, or otherwise derive more fun for the relative uniqueness? Or is it because it can actually be expected to produce better outcomes from a perspective of genuinely improving a monetary outcome that really does matter to someone?

If you need to be different, call yourself awesome, or wear a pink tutu at a fun run...go for it. Variety is great! If being different involves strapping yourself to a Korean missile, it's still something 98% of people wouldn't do. But...maybe some people, even the average ones, can appreciate that being different for its own sake doesn't make any effort in that regard a sensible one.

Also, apparently, ridicule is not reserved for those at the extremes.

In the population of ASF/retail SMSF, having a well researched/plausible, well considered, appropriately diversified (as opposed to neccesarily highly diversified) portfolio would fall well in to the wings. It's the punter garbage which makes the bulk. Which, I have said, is fine if it's just for fun.

 

[tech/a]

So are you proposing an extreme process just to be different, or otherwise derive more fun for the relative uniqueness? Or is it because it can actually be expected to produce better outcomes from a perspective of genuinely improving a monetary outcome that really does matter to someone?

In finding a way that is different to what the majority do/think or put in place in areas where I'm looking for an edge or a uniqueness what I do and have done can be seen by most as extreme---they wouldn't do it!
Yes I expect better outcomes if I don't get out of the box I won't find something different with the "POTENTIAL" of above average results.

If you need to be different, call yourself awesome, or wear a pink tutu at a fun run...go for it. Variety is great! If being different involves strapping yourself to a Korean missile, it's still something 98% of people wouldn't do. But...maybe some people, even the average ones, can appreciate that being different for its own sake doesn't make any effort in that regard a sensible one.

One mans stupidity is another's brilliance.
In 96/98 when we purchased 10 4 bedroom houses Friends took great joy in ridicule
Those same friends look for advice in 2003/4
Being different is acquired and definitely not for those who reside within the masses.

Also, apparently, ridicule is not reserved for those at the extremes.

Apparently

In the population of ASF/retail SMSF, having a well researched/plausible, well considered, appropriately diversified (as opposed to neccesarily highly diversified) portfolio would fall well in to the wings. It's the punter garbage which makes the bulk. Which, I have said, is fine if it's just for fun.

You have narrowed the field.
With very few gaining more than a benchmark index and with even fewer capable of trading a reasonable sum to a worthwhile profit, encompassing testing research trial and error ( forward testing ) and most importantly trade management and risk mitigation then they are best suited to the masses---it won't be their fault.

Labelling everything outside of convention as garbage is ignorant in itself.
Your smart enough to know daring to be different isn't as simplistic as you are trying to make it.
Not everything needs to be complicated and available exclusively to the educated of this world
Even Ducks can be awesome.
After your condescending analogy---I made it so.
Now that's fun!!

 

[DeepState]

In finding a way that is different to what the majority do/think or put in place in areas where I'm looking for an edge or a uniqueness what I do and have done can be seen by most as extreme---they wouldn't do it!
Yes I expect better outcomes if I don't get out of the box I won't find something different with the "POTENTIAL" of above average results.

In seeking to improve, changes are made. In order to be better, you have to be POSITIVELY different to those who did worse. In obtaining outsized performance, outsized difference had to occur.

My assertions only relate to whether those outsized differences, like a 2 stock portfolio, actually made any sense. I agreed that focus can improve outcomes. I assert that the improvement in prediction that arises from concentration of effort needs to be huge for your assertions to make sense. That level of huge is virtually implausible unless there is something very odd going on.

You seem to think I object to difference. I don't. I was/am regarded as unbelievably extreme in what I do.

One mans stupidity is another's brilliance.
In 96/98 when we purchased 10 4 bedroom houses Friends took great joy in ridicule
Those same friends look for advice in 2003/4
Being different is acquired and definitely not for those who reside within the masses.

If that choice was well informed, then it was an excellent one. If it was a punt, then the outcome was the result of a big punt and you should receive the kudos that comes with it and not be offered the kudos for being genuinely well informed.

I note you bought 10 houses (presumably with leverage)...but only want 2 stocks in a portfolio.

You have narrowed the field.

Apart from retail/SMSF, the only other major categories of investors are institutions. Apart from highly specialised situations, none would keep their jobs if running 2 stock portfolios. I was doing you a favour by keeping the field narrow.

Labelling everything outside of convention as garbage is ignorant in itself.

I agree. Yet labelling everything which is conventional as garbage is also ignorant or demonstrating an insatiable need for attention.

Your smart enough to know daring to be different isn't as simplistic as you are trying to make it.
Not everything needs to be complicated and available exclusively to the educated of this world
Even Ducks can be awesome.
After your condescending analogy---I made it so.
Now that's fun!!

The quote I responded to espoused difference for its own sake as a favourable thing and disparaged the 98%. I found that simplistic and highlighted that not all difference is favourable.

There is nothing more complicated going on here beyond saying that if you used to have a, say, 10-20 stock portfolio but now choose to deploy that in to a 2 stock portfolio, you need to have some pretty awesome increment in skills arising from focus .... or, the sum of money involved is actually irrelevant to you. None of that requires much education or experience to understand at all. Howard can give you the maths if you like, using assumptions as would be required for a trade as opposed to a close-you-eyes forever type of investment. You clearly trade.

The term Awesome wasn't actually directed to you. It related to overconfidence, which is a widespread phenomenon amongst investors - leading them in to concentrated portfolios and other trading activity which defies logic had they known their true abilities. So, if you wish, you can feel free to furl up your protest.

This is fun. When at dinner, if duck is on the menu, 98% of the time, I eat it. Next time, I'll do something different as a tribute.

 

[Quant]

Buffet is held up as the god of investing and no-one is suggesting he hasnt exploited circumstances brilliantly but we must be aware that the markets today are hugely different to the time Wazza made his ultimate returns and therefore what worked for him while SPX rose from 65 to 1500 during 1975 to 2000 is'nt neccessarily as relevant in todays world
I think reading this book gives a bit of insight into what i believe to be the foundations of a proactive road to wealth in the investment type scenario , Trading is required and dealing with risk is required . There are no easy answers and a sweet spot needs to be established . Trading specs is fine and can realise great returns at certain times but scalability , liquidity and the position in the cycle make it as risky as anything ( probably riskier ). It can be a piece of the puzzle sure but it def is'nt a stand alone answer . Ultimately the best returns will come from an adaptive methodology as markets are very dynamic so thinking should also be dynamic . Good luck to all

 

[tech/a]

In seeking to improve, changes are made. In order to be better, you have to be POSITIVELY different to those who did worse. In obtaining outsized performance, outsized difference had to occur.

My assertions only relate to whether those outsized differences, like a 2 stock portfolio, actually made any sense. I agreed that focus can improve outcomes. I assert that the improvement in prediction that arises from concentration of effort needs to be huge for your assertions to make sense. That level of huge is virtually implausible unless there is something very odd going on.

You seem to think I object to difference. I don't. I was/am regarded as unbelievably extreme in what I do.

You don't seem to be a crowd member particularly if you like duck. Its too rich for me.

If that choice was well informed, then it was an excellent one. If it was a punt, then the outcome was the result of a big punt and you should receive the kudos that comes with it and not be offered the kudos for being genuinely well informed.

I note you bought 10 houses (presumably with leverage)...but only want 2 stocks in a portfolio.

It was to me a no brainer I could finance 100% and rent would cover it well over the repayment.
Rinse and repeat---The 3-500% profit was right place right time

2 stocks
Quick turn over I can invest the price of a home in a click of a mouse and sell it just as quick
I can trade sizable sums.

Apart from retail/SMSF, the only other major categories of investors are institutions. Apart from highly specialised situations, none would keep their jobs if running 2 stock portfolios. I was doing you a favour by keeping the field narrow.



I agree. Yet labelling everything which is conventional as garbage is also ignorant or demonstrating an insatiable need for attention.

Not doing that --- just making a point which most can see.


The quote I responded to espoused difference for its own sake as a favourable thing and disparaged the 98%. I found that simplistic and highlighted that not all difference is favourable.

There is nothing more complicated going on here beyond saying that if you used to have a, say, 10-20 stock portfolio but now choose to deploy that in to a 2 stock portfolio, you need to have some pretty awesome increment in skills arising from focus .... or, the sum of money involved is actually irrelevant to you. None of that requires much education or experience to understand at all. Howard can give you the maths if you like, using assumptions as would be required for a trade as opposed to a close-you-eyes forever type of investment. You clearly trade.

Yes but a more pressing issue is on my door step--FOOTY gotta go.

The term Awesome wasn't actually directed to you. It related to overconfidence, which is a widespread phenomenon amongst investors - leading them in to concentrated portfolios and other trading activity which defies logic had they known their true abilities. So, if you wish, you can feel free to furl up your protest.

This is fun. When at dinner, if duck is on the menu, 98% of the time, I eat it.

Oh
I gladly accepted it.

 

[tech/a]

Buffet is held up as the god of investing and no-one is suggesting he hasnt exploited circumstances brilliantly but we must be aware that the markets today are hugely different to the time Wazza made his ultimate returns and therefore what worked for him while SPX rose from 65 to 1500 during 1975 to 2000 is'nt neccessarily as relevant in todays world
I think reading this book gives a bit of insight into what i believe to be the foundations of a proactive road to wealth in the investment type scenario , Trading is required and dealing with risk is required . There are no easy answers and a sweet spot needs to be established . Trading specs is fine and can realise great returns at certain times but scalability , liquidity and the position in the cycle make it as risky as anything ( probably riskier ). It can be a piece of the puzzle sure but it def is'nt a stand alone answer . Ultimately the best returns will come from an adaptive methodology as markets are very dynamic so thinking should also be dynamic . Good luck to all


View attachment 70505

Who mentioned Specs
You can trade anything.

 

[Quant]

Who mentioned Specs
You can trade anything.

( This has taken time to perfect but I have had up to 60% of my allocated funds (to small caps)

I dunno

 

[tech/a]

I dunno

Clearly the idea isn't limited to Small caps
I personally have had 60% on a single stock during a single day

You could easily do that with a blue chip

Same principle

 

[DeepState]

I have this view of trading versus investing.
... Investing. I buy something (always long, never short), call my lawyer, and have instructions for the disposition of that item following my death written into my will.
... Trading. I buy something (or go short), anticipating that I will exit that position sometime. The time might be in hours or days, or perhaps years. But I do not expect to hold it for the remainder of my life. This gives me an incentive to consider in advance what might cause me to exit the position and be prepared to do so.

This is curious. You've said this before.

An investment is something you buy with the full intent never to sell it in your life time. I'll take it one step out and say that you don't expect dividends from this at all (like, say, BRK*), just to make this a super duper long term investment with literally infinite duration...just for this discussion.

Firstly, it implies you never need the money tied up in this stock during your lifetime.

Secondly, from the outset, you have no intention of ever reviewing the position again. You buy and talk to your lawyer. If you have an ability to value a company or gauge its prospects over a time frame that is less than your presumed lifespan, you actually choose not to bother using this from the outset...which makes me wonder on what basis the original decision was made. If you have no skill whatsoever and just bought something random and then accept that any decision from then on is essentially random, it might make sense to hold it forever....if you don't need the money. Set and, eventually, completely forget.

In your lifetime, there is no practical difference between making this investment and investing in dig shot. Except the alternative to stock is possibly more humorous when written in to a will and sends a different message to the bequeathed.

If you had any skill and were trying to leave some wonderful gift to the next generation, you'd use what skill you had to make sure this was as best handled. This would include keeping an eye on it in case there was a better way to deploy the value during the remainder of your lifespan....unless you didn't really care about that or felt your time was better spent elsewhere.

So, these 'investments' are rather curious.

They would be undertaken by people who have no idea what they are doing or, otherwise, know but can't be bothered from the outset as a positive decision....and definitely don't need the money. In such cases, outcomes are irrelevant and a single stock portfolio is totally fine. Pick any stock you like.

I really can imagine that things like a house, or works of art...things with values that fluctuate but where you own them to enjoy them...do fall in to this category of investment. A share of BRK? Not so much.

--
*whom I know you do not particularly respect on the grounds of those outcomes being a lucky draw. It certainly can't be absolutely disproved.

 

[kid hustlr]

Surely there's a direct correlation between how 'good' you are and how diversified you should be.

I'd trust DS, Craft or T/A to manage a smaller basket compared to my taxi driver for example

 

[tech/a]

Surely there's a direct correlation between how 'good' you are and how diversified you should be.

I'd trust DS, Craft or T/A to manage a smaller basket compared to my taxi driver for example

Doesn't make sense
I was under the impression people placed stocks in a portfolio
Because they expect a capital gain in share price.
Sure some are selected for dividend returns but none for anticipated
Falls
So if you select 20 stocks I'd have thought you'd have to be a lot
Better at selecting stock than people who pick one or two.

My findings are more about selection/watch lists /trade management/ position sizing
Compounding/pyramiding than being right.

There is a lot more behind the statement than changing your view from 10-20 stocks to 1 or 2

 

[kid hustlr]

Doesn't make sense
I was under the impression people placed stocks in a portfolio
Because they expect a capital gain in share price.
Sure some are selected for dividend returns but none for anticipated
Falls
So if you select 20 stocks I'd have thought you'd have to be a lot
Better at selecting stock than people who pick one or two.

My findings are more about selection/watch lists /trade management/ position sizing
Compounding/pyramiding than being right.

There is a lot more behind the statement than changing your view from 10-20 stocks to 1 or 2

I guess I meant the cab driver who has no idea should buy the index, whereas has someone who has a proven track record of beating the market with a specialised methodology should do that.

Enjoyed the thread, hope it continues.