Since I am in the mood to ramble on, I would like to write about Portfolio Management and the amateurs. It is a more advanced topics, but anyway.
Many years ago I spoke with a cousin-in-law who is a professional investment manager in some of the biggest companies overseas; and when we discuss the topic of investment, me and my (by then) years of CPA qualification cannot understand anything that he mentioned. He focused on portfolio allocation and uses the greek letters like Beta and many other sentences which I have never heard before. While me, the good old amateur, was more interested in Price Earning Ratio and recently Enterpise Value / EBITDA. We could not have spoken in any more different language, although both of us are very interested in the same topic: investments in shares.
Many years have passed; and only recently I realised that having a good portfolio allocation is the main biggest difference between professionals and amateurs. Amateurs like me don't have interest in looking at stock market full time. we only have a few good ideas a year. We fall in love with our ideas, we watch our few stocks like kitten in love. Professionals have many great ideas every year. They have a team of 10-20 people to find great ideas every minutes. What matters to them is not to pick the right stocks, they have researched many great stocks and know them more intimately than any amateurs can hope to achieve.
What matters to them is to create the best portfolio that is limiting their downside and their exposure to unpredictable but inevitable mistakes in some of the sectors and companies which they have chosen. Amateurs want to punt it all in one good idea. Professionals have too many great ideas, they only want to make sure that on balance their great ideas ending up in net positive. Someone (peter lynch?) said that most of his stock selections either break even or making small loss; but the 10% that he got right, basically triple and quadruple in value. Professionals are not in it to make quick buck, they just want to minimize their mistakes so they kept getting paid their incredibly generous management fees years by years. And they do that by minimizing their exposure to the fatal mistakes: going bankrupt. That also means they will not make a crazy returns (that's for Hedge Funds) of 200%+.
