jmorace

Risk Management and Concentrated Positions

Another great piece.

It appears so many of these investment firms were not really using the tools available for modern portfolio management. Of course, the two that seem to be standing out for using them correctly are Pimco and GoldmanSachs. Gs is forever talking about value at risk and pimco seems to have a strong investment thesis for what's going on.

Be that as it may, I've been following your articles and theory for some time now. You've really been right on and laser like in your articles. Congrats.

What would be helpful to me at this point, as an individual investor, is some insight into a few basics. Perhaps you could point me in the right direction to find some information on them. For instance, how is it best to enter into and adjust a modeled portfolio? Does one leg into this? Or just jump in 100 percent? Perhaps average in over the course of 3 months or something else? Also, what are the options in terms of rebalancing the portfolio allocations? Once a year? Every quarter? How does this work?

Finally, some insight into the tax consequences of Tips held in taxable accounts would be great.

Thanks again for the great work,

jmorace

The Nature of Risk

Great piece Geoff. I think you make a tremendous amount of sense here with this approach. But, I'm not sure how realistic your underlying assumption is--that an individual buy and hold a stock with a time horizon of infinity. This begs the question of why the particular selection was made for that stock in the first place.

To pick an individual equity implies a process of selection -- so even if everyone's selection process is different, some reasoning has occurred involving fundamental, technical, random or combination of reasoning schemes. But hand in hand with that selection has to be a system of rules as to how to mange these individual selections.

I see it breaking down into two areas: First, a change in the investment reasoning and second a robust system of cash management. So, if an individual equity is selected for a fundamental (or technical or combination of) reason(s), and one of those reason changes, the equity should be sold. (Note this is completely different than liquidating an asset class.)

In terms of cash management, it’s interesting to note that if a stock declines 50% it takes a 100% gain on it to get you back to zero, which is pretty hard (if not impossible) to do. So the stock should be sold well before it gets this damaged. If s/he has a coherent system of selling (and buying) rules in place, the individual equity holder will not have to confront this ugly situation. Which also precludes having a total loss (for the former owner, since they've already sold), even if the stock goes bankrupt.

That said, I do think running the stocks through the qpp program can be a useful screen to use in addition to other selection rules.

best,

JMorace