Portfolio Management

 

We measure the “rate of return” from an asset, with the annualized rental income per the market price. At the time of investment, the price is certain while the future incomes are not: they are “expected” at best; some are more certain the others, but nothing is completely free of uncertainties. Bluntly saying, investment is speculative; to be honest, it’s sheer gambling.  

             On the flipside, a conventional wisdom tells us “not to put all the eggs in one basket.” In a similar vein, we are to and do make the so-called “all-in bet,” if at all, once in a lifetime. Most of us wouldn’t dare to cross another River of Rubicon for fear of becoming a traveler on the River. Watch your steps!

 

Sports betting. Suppose any of us is soon to bet a big money at a ball game neck-and-neck between the home team and the away team. Which team should and would she pick as the (expected) winner? Of course it depends, but “Wise women say only fools rush in” to betting on the home team; if ever, it’s gonna be another “all-in investment.” 

             Specifically, here we have a 2x2 matrix of scenarios:

1)     A double whammy: She loses the money while her team was losing the game.

2)     A real loss but for a nominal win (“happiness”): She loses the money while her team was winning the game.

3)     A real win but for a nominal loss: She wins a wealth while her team was losing the game.

4)     A double bang: She wins the money while her team was winning the game.  

 

On the sidewalk of the game or the matrix, the conventional wisdom direct us to stay in the middle. Aristotle says that in the middle of two vices is the virtue; Confucius Say, “Excessiveness is no better than shortness.” Boys, be conservative! That was then.

             This is now: Make investment rationally. Girls, be clear about the risk-return profile! The first “strategy” of investment is diversification, as long as it is “in the long run” to “all” the Crossing for good. 

            Look at that: A cleaver girl or a smart boy never ever becomes an entrepreneur without a put option. Among the rest of us, a limited liability company is “an investment with a put option”; or a call option when “the put-in money keeping company with the put option.” Shh, that’s no less safe than managing Bear Sterns with Ben Bernanke on the Fed chair. In that regard, some of us may have heard of the “Greenspan put.”

             A clue, by the way: The negative of a cash outflow is a cash inflow; betting on the inflow with a put bought at the price of the “seed money” becomes a call in trade of “options” as at an LLC, in CBOE or elsewhere. Equivalently, a bet + a put= a call.  

 

A portfolio of assets. When investing for the future, the rational households carry a portfolio of assets, interrelated as remotely as possible. For instance, a household and the home team are on the same land if not on the same boat. On the flipside, the away team is very remote physically as well as emotionally. Bet on the away team, and you will be "happy" at worst.  

             The unanimous answer: Don’t try to hoard two preferences at the same run of time.

Diversifying risk down. The first principle of finance tells that the household carries for the purpose of investment a portfolio of assets as diverse as rational. For instance, when GM is already in the portfolio, another pick might be Unilever or Tesla over Bridgestone or Toyota. 

 

Which to prefer for the sake of investment. Times are good sometimes, while bad other times. In the meantime, we live in the short run as the way to live in the long run, TINA.

             The rest of us: According to the General Theory of Investment, we prefer the physical assets to the emotional liquidity; in the first place, the former is “real” while the latter is “nominal” or in name only. We care about the substance incomparably more than the appearance. Don’t even think about unanimously preferring the nominal asset; when the unanimous preference came true, all the assets would become valueless due to an aggregate  lack of preference.  A lining in the cloud: by definition in economics or in mathematics, the nominal asset, or the legal tender, shall be un-valuable with a 100% surety. There is no alternative to compare with so as possibly to measure the value thereof.  

             Macroeconomists: When in recession, they unanimously prefer liquidity to all assets so as single-mindedly to “go for fiscal” and build so many white elephants, which are much more costly than “digging a ditch just to refill it.” After all, land improvement is much preferable to paying money to maintain and sustain the long-living elephant all in white.  

Bob Dylan - Crossing the River of Rubicon