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Security Analysis and Portfolio Management
Notes Introduction
Building a successful investment plan for the twenty-first century may require a fundamental
change in the way we think about investing. For instance, while taking less risk, a portfolio
comprised of only 60% equities that outperforms the Sensex by a wide margin should certainly
be considered a superior portfolio. Furthermore, new advances in investment and finance offer
us solutions both simpler and more elegant (and very, very different) than what we grew up
with.
We have been conditioned to think of market timing, stock selection, and manager performance
as the keys to success. Because these beliefs are deeply ingrained, even superior investment
strategies, like Strategic Global Asset Allocation, take a little getting used to.
What I'm advocating is so different from public expectations that sometimes people look at me
as if I'm not quite right or a few bricks short of a full load. For instance:
1. As an investment advisor, I'm expected to have an opinion on where the market is going.
Well, I have an opinion, but it's no more likely to come true than yours or your dog's.
People are offended and disappointed when I tell them that.
Thanks to the media, we are exposed daily to countless 'experts' who are worried about
the market. Their indicators and forecasts point to a possible 'correction.' They are prepared
to retreat to the 'safety' of cash. This allows them to look responsible, conservative, and
caring. By pandering to the public's fear, they hope thousands of anguished investors will
decide to trust them with their money. On the other hand, advisors who insist on remaining
fully invested at all times appear wild and crazy.
2. Advisors are supposed to beat somebody or something. Often the first question people
will ask is: "What kind of numbers have you achieved this year?" Those numbers become
the chief yardstick to determine if the advisor is good or bad.
3. I'm still waiting for the first investor to ask: "What's the best long-term allocation?" Or,
"How much risk do I need to take to meet my goals?"
Without tools to evaluate risk or choose between alternative strategies, investors are left with
just one number to compare performance. By default, year-to-date or last year's performance
figures are the only criteria for measurement. If those figures alone determined a successful
investment plan, we could all buy one copy of Money Magazine each year, pick the single, top-
performing mutual fund, and go sailing. Unfortunately, the Money Magazine approach is often
the worst way to form a strategy.
Did u know? What are the phases of Portfolio Management?
1. Specification of investment objectives and constraints
2. Choice of asset mix
3. Formulation of portfolio strategy
4. Selection of securities
5. Portfolio execution
6. Portfolio revision
7. Portfolio evaluation
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