Donald, I promised I would say more about Asset Allocation. In particular, I will try to answer definitively your question about how much of one's portfolio should be invested in WIND vs. money instruments and other stocks.
But before I begin, I should warn you that Asset Allocation or Portfolio Selection, or whatever name you want to give to it, is far more challenging than the problems we encountered trying to place a monetary value on a stock like WIND. On the other hand, the underlying issues are critical to the thoughtful investor, and need to be wrestled with and understood. They are also extremely controversial, if only because a number of successful investors scoff at traditional definitions of risk along with most techniques used to minimize risk through asset allocation. I consider myself, at least philosophically, in that camp.
The problem is that most scoffers are satisfied to counter traditional approaches with bromides. In all honesty, it is hard for platitudinous comments to stack up well against well thought out developments built on top of foundations of solid logic. Well, Warren Buffett is right, and the traditionalists are "limited", and we have to take a little time to try to show that - using logic. The development of our logical toolset comprises Part I. I apologize in advance if you have an aversion to formulas, but what I present should be understandable to anyone who can still remember high school calculus.
Since our logical efforts will result in a formula, we need to exercise it using a few examples made of case studies. That part (Part II) is easy and fun.
Finally, it is essential is compare the approach presented with more traditional approaches, if only to answer how the result can be so different if we are all rational. (I mean "rational" in a formal way, i.e., none of us violate generally accepted axioms of rational investing.) It simply is not permissible to dismiss most established tenets of traditional financial management (e.g. the absolute requirement that investments be diversified and portfolios be risk balanced) without explaining where the traditionalists go wrong. This makes up the final Part III.
Allen |
