"The warren Buffett Portfolio"by Robert G. Hagstrom is excellent book to know whether we should be investing 100% in Q or not. Chapter 6 (The mathematics of Investing) is extremely well written.Hagstrom's explanation of how to apply probability theory to investing with conclusions that fly in the face of conventional wisdom is remarkably clear and readable!
On page 126-127 of the book:"If you know the probability of success, you bet the fraction of your bankroll that maximizes the growth rate as: 2p-100%=x. For example, if your probability is 70%, bet only 40% percent of your equity. If you know the odds of winning are 100%, the model would say, bet your entire bankroll!.
Buffett's decision on portfolio management is an exercise in his subjective probability.Berkshire Haathaway bot $1 billion of Coca Cola stock, an amount that came to over 30% of the total value of portfolio. by yr end 1998, that investment was worth over $13 billion.
By the same token, if we see the odds of NTAP is above 75%, or Q is 100%, investing 50% of the portfolio is logical. It is a good challenge against Modern Portfolio Theory we have been misled for years!
Hanney
PS. my personal experience: CBOE's software Option Tool is better than McMillan's book. You can practice and polish your skill by using Option tool, and it is free. Just call them and ask for it or down loan it from CBOE's site. |
