Beginnings and Endings

This weekend I was deeply grieved to hear the passing away of a classmate of mine from India. He was a gentle soul and was well remembered by all of our classmates for who he was and his talent with playing the flute. He had been battling with prostate cancer for a long time and finally succumbed to it. He leaves behind very warm memories of the friendships from our school and college days that seem just like yesterday in our minds. I know this will be a very difficult time for his family; his wife and his daughter, whom he leaves behind.

With those kinds of thoughts swirling in my head, I was hard pressed to think about what I feel like writing about this week. And I thought maybe I should touch on new beginnings. I was talking with a good friend’s son this weekend on the subject of managing 401Ks. He has been working for about 4-5 years now. I felt there are at least two paths to follow to becoming self-reliant in investing, and maybe a dash of a third.

The first is learning basic portfolio management, and the importance of keeping a diverse selection of investments to manage volatility and keep steady growth. Rebalance once a year and not too often. The best book on the subject is the recent publication called “The Ivy Portfolio” by Faber and Richardson. It goes through how the top two endowment funds have amassed a huge wealth by losing very little and getting solid steady gains year after year. Preventing a large loss coupled with steady gains is the path I follow. I would be thrilled if I could duplicate anything close to their performance! The book takes you though how you could set up a portfolio along their lines, balance once a year and then through tactical asset allocation, improve the rewards and reduce the drawdowns.

The second path is one of technical analysis. When investing in a stock, commodity or mutual fund, how can one use technicals from the data to figure out when to exit an investment during bad times and when to enter before it makes moves upwards? The best book I have found on that subject is “Technical Analysis from A-Z” by Steve Achelis. I know I have mentioned this book before in one of my earlier blogs. It was one of the first books that started me off on my journey to learn how to be self-reliant in investing. Once I learned some of the basic tools of technical analysis, I complimented my learning with Metastock software. I still use Metastock for trading systems and charts analysis on a regular basis.

The third is learning Position Sizing. How much of a portfolio should I have in a single investment? How much loss should I tolerate from a single trade? This third method is more applicable to those who wish to trade individual stocks and may spill over to portfolio management as well. In my mind it is how you can survive in the trading business long term, long enough to show profits. Improper position sizing on small trading accounts will cause fatal failures and account blow ups. It will leave a distaste for trading that can rarely be overcome later on.

Nothing is definite in life or investing. We all know that we have to go one day. What we would like to do is provide a small amount of security for our families, for ourselves and maybe share our good fortune with others if we wish to. Money is not an end in itself. But if we can enjoy the journey, then that itself is a positive way to live our lives.