On balance (Financial Athlete #13)

In gymnastics and martial arts, balance cannot be overemphasized. In other sports, balance is rarely discussed.

Portfolio managers typically stress the importance of a balanced portfolio for paper assets. Investments in stocks are spread across virtually all sectors of the economy, and a significant percentage of the portfolio is kept in cash and invested in bonds to hopefully offset any downturn in the price of stocks. This is how automatons control assets. This approach is far too mechanical for anybody aiming to achieve big returns. It’s designed to keep portfolio managers from failing miserably.

An emphasis on mechanics is frequently subscribed to in sports instruction as well. My martial arts instructor has a different philosophy about teaching Wing Chun. “Balance art with science”. Art calls for the natural flow of the body and impulse responses (there’s no time to think). Science calls for aligning the body properly and impulse training to defend and attack effectively.”

Investing in stocks for high returns while managing risk involves both art and science. Qualitative matters such as evaluating management competence and integrity, market trends, and the company’s reputation in the industry fall under “art”. Quantitative matters such as reading financial statements and ratios fall under “science”. In the latter, search for safety and intrinsic value below market price. In the former, search for aggressive growth opportunities to achieve a several fold return of a long-term investment.

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One Response to “On balance (Financial Athlete #13)”

  1. The all around athlete (The Financial Athlete #110) « Pasta Man Vibration Says:

    […] For choosing stocks, balance qualitative and quantitative aspects of an investment. For more on this review On Balance. […]

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