Portfolio Management

I was reading a blog. The author is a professional portfolio management.

He has very good points about investment.

Here are the whole article.

The Wall Street Transcript regularly presents interviews with analysts, corporate managements, and portfolio managers. In a recent Wall Street Transcript interview (subscription required) Gary Furukawa describes his firm's approach to investing:

We have a strong contrarian bias that helps us be opportunistic in our approach. While we recognize that the market is very efficient in discounting information, investors as a group can form incorrect opinions, biases, or assumptions regarding the prospects for a particular company. We like to question those core assumptions and assess how we would view those assumptions differently than how the Street might be viewing them. At some point in time, whether it be through an internal catalyst, through some type of exogenous event, or whether it just be through the passage of time, sentiment usually begins to swing back toward the company.

Mr. Furukawa and his firm are quite right. Isn't this the essence of buying a turnaround situation or optimizing the short-sale of an expensive stock? Very early in my career there was an unshakable belief in the ever-present threat of inflation and the inevitability of higher energy prices. Those 1970's and early 80's beliefs were congenitally implanted into portfolio managers' DNA. You were an idiot, not to accept those assumptions.

I was an idiot...thank God, I built a career out of questioning what was a ubiquitous mainstream assumption. The ability of the consensus to delude itself entirely and miss the obvious is one of those features of human behavior that you can overcome and master to create investment performance.

Assess the critical assumptions that you endorse when you select a security. How reasonable is a 30% or 40% growth rate when that represents the consensus? What would the valuation look like if a more "normal" 10-15% growth rate were the future growth rate? What can go wrong in your assumptions?

Here is a screen of companies that have high estimated growth rates greater than 20% and have appreciated YTD greater than 30%: Spreadsheet link

Bottom line, know what you own and why. Don't deceive yourself into accepting assumptions that are arbitrary or indiscriminate.

In yesterday's marketthoughts.com (subscription required) Henry To presents my post on self-deception. I think one of the keys to successful portfolio management is the ability to avoid self-delusion. If all of us are operating with the same assumptions in thinking about a business, why would any of us expect to garner an advantage?


As I say in the article,

Guard yourself against the possibility of self-deception. Wishful thinking is not a subset of thinking; it is merely a substitute for thinking. Don't succumb to the seduction of conventional wisdom and elegant theories. Remember, mankind has subscribed to a belief in a flat earth for much longer period of time than the modern viewpoint. But for many years, the prevailing wisdom assumed the tenets of flatness! Theories tend to rely on simplifying assumptions…theories represent an approximation of reality.

More on this topic in a later post and book review!

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Keep it in record for my future review

Happy New Year

Just realize that I have not post a single message for year 2006.

This year is quite interesting for me. I visited China in February. Since then, quit my job in Seattle and moved to Atlanta and joined a Forbes 400 company. It is quite interesting and after six months, I quit my job and joined a much smaller publicly traded company in Philadelphia. I have more chances to visit China and Asia. That is the whole idea.

This year, my clients' and my portfolio have not outperformed because I did not actively trade the oil stocks. Also the big holdings in income trust have been got hit by Canadian government new tax policy. Luckily, I stick to diversification principle. Our portfolios are recovering.

The lesson we have learn is you can easily tell politicians are lying because their lips are moving. Stephen Harper specifically stated if he was elected in 2005, he will not tax on income tax.

Here is his speech. http://www.youtube.com/watch?v=U9mibZYpVPY

For 2007, I am betting on gold/silver and base metal stocks. Our Chinese stocks appreciate significantly. I will sell my petrochina at $150. This stock has done extremely well for me.

I miss PD 20% jump in one day. Not sure I have done the right thing. But since Jim Cramer recommended it, this is a clear sign to sell. Anyway, I am not regret since I have gain more than 100%.

Happy New Year!