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Portfolio Management Art Of War
It’s been a long and hard decade…Having been managing investment portfolios and accounts for the past decade both professionally and personally, me, like an army of other portfolio managers out there, arenot only looking for the perfect trading system, but also the perfect way to manage aninvestment account.Indeed, there are whole bombardments of risk management and portfolio managementtheories out there that it is mind boggling. There are risk management concepts thatattempt to govern each investment trade and position sizing based on complex probabilitycalculations and there are even concepts that were born in Las Vegas, adopting what highstake poker gamblers do. The problem with these concepts is that they are mainlymathematical concepts that took the human factor out of the game completely.Let’s face it, if you have ever managed a portfolio or an investment account, you willknow that it is never as simple or left to chance as a game of poker and it is never asmechanical or emotionless as the mathematical calculations claim.After a decade of thinking along these lines, I realized that these portfolio managementconcepts are important but there must be something on top of these that must govern themind that executes these concepts. This “Meta Program” must be the “OperatingSystem” in the mind of the portfolio manager and rule the way the portfolio manager or trader looks at a portfolio or investment account. With such a “Meta Program” in mind,the portfolio manager will be able assess changes in a portfolio or investment account inthe right light and to behave in ways that are appropriate to the prevailing situation.Here I present my personal “Meta Program” called the Portfolio Management Art of War.Every Investor, Trader, Fund Manager or Portfolio Manager is an Emperor or King of hisor her own trading Empire. Your Empire exists in a world that is engulfed and consumedin an eternal warfare. This world is called the Exchange (stock, forex, commodity or whatever exchange you are involved in.).The boundaries and resources of your Empire are defined by the size of your Fund. SomeKings have bigger territories and some have smaller ones but all are driven by thecommon need to survive in the Exchange by expanding their territories and boundaries.As a King, your mandate in the Exchange is to find ways and means to expand your Empire over time. If that cannot be done, you will soon find that you might not be theKing of this Empire for very long.In order to expand one’s territory, one must lead one’s Empire into war against the rest of the Exchange. Some Kings are more aggressive and some, more conservative. Regardlessof level of aggression, every King’s resources must be committed in various ways into
 
 battle against the Exchange. Every winning battle expands the King’s territory and everylosing battle loses part of the Empire and the boundaries shrinks. Some King has a target boundary size but know that as long as you remain a King, you will one day be drawninto battle against the Exchange again. The war in the Exchange is eternal.In order to battle in the Exchange, every King must have a Strategy. Some splits one’sarmy up into many squads which fights independently and some engages in a total war against the Exchange with the whole Empire leaving only very little backup. Someorganizes one’s army into many functional squads, with some squads fighting moreaggressively and some squads fighting more conservatively. This Strategy is called thePortfolio Management System that the King chooses to adopt. Each squad then fightsusing specific Tactics called Trading Systems.How a King chooses his Strategy and Tactic depends largely on the part of the Exchangethat a King chooses to fight in. Every part of the Exchange (Forex or commodity or equity etc..) has its own unique characteristics and rules of engagement which the Kingmust be thoroughly familiar with.Every time a King sends forward a squad to do battle in the Exchange by drawing uponhis Empire and placing a position in the Exchange, it must always be held in mind thatthere is no guarantee that you will ever see that brave general that was being sent forthagain. If the squad loses, you lose a part of your Empire to the Exchange. Therefore youmust take very frequent look at the overall map of your Empire (which should always be pinned up prominently in your war room.) and monitor how far back the Exchange hastaken your Empire before thinking about and making your next move. If the squad wins,that general expands your Empire farther into the Exchange. That gives you moreresources and more troops to wage your next battle. The King must then decide howthese new resources are to be deployed… shall he assign the new troops into his existingsquads? Should the King hold the new troops and resources back as backup for future battles? Should the King expand on the number of squads using the new troops? Strategicdeployment of these resources could turn the tide of the entire war.Before a King sends a squad forward, he must first assess the capability of the Generalthat is to lead this assault. This is your Research. If you are highly confident that thisGeneral will win the battle, should you give him more troops so that he can claim moreterritory? If you are slightly less confident of that General, should you cut back on histroop or hold back the assault altogether?Finally, if your Empire has been compromised and the Exchange has claimed asignificant portion of it, is it time you consider a change in Strategy and Tactics? Even if the Exchange has claimed a large portion of your Empire, you might still be able to wagea series of battles so successful that you could probably claim the Empire that you startedwith and maybe even more, like so many famous Kings and Generals in the world. So,even if your Empire has taken a rough hit, it is not time to surrender yet. You are theKing. If you give up, the whole Empire falls.
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