Fortune’s formulae – II

December 31, 2006

I just finished reading the book. In addition to my previous post on the topic (see here), I found the following important points and learnings

– Size your bet/ stock position based on the edge or odds. Although I don’t have a scientific formulae behind it, my typical approach is to put 2-5 % of my portfolio in a stock where the odds are 3:1 or less. For cases where the risk is low and I have a very high level of confidence, my typical wieghtage is around 10%. I however rarely exceed 10% in a single stock. I however do not resort to portfolio rebalancing and allow my winners to run.
– Geometric return is more important than arithmetic return. Geometric returns are the compound returns from an investment whereas arithmetic returns are the average of the annual returns.
– Fat tails in the distribution of returns can cause large fluctuations in the portfolio value. As a result managing risk through optimal portfolio sizing and diversification is important (personal thought: buying real estate in 5 different cities is not diversification. More important diverisification criteria is to spread money across asset classes)

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s

%d bloggers like this: