Contributors

About Your Investment Portfolio... yes, you!

Imagine that you are running a business. A specific "niche" operation like a book store, a giant hardware store like Home Depot, a professional service operation of some kind, a manufacturing or research facility, or even some form of nonprofit organization. What would some of your basic operating principles be?

Well we all know what "Job One" is at Ford Motor Company, and without quality, not too many businesses become long term success stories. Another key survival element is a diverse product line, one that is flexible enough to adapt to changing environments and differing tastes and needs of the customer base.

A third essential feature of a successful enterprise is the income that it produces, which must be enough to: pay fixed and variable expenses, attract high quality staff, innovate, prepare for contingencies, finance new inventory, and to grow the business. In most businesses, income comes from sales of either goods, services, time, or property of some kind.

And finally, as a result of the income production, there must be an element of operating profit (the amount greater than is needed to pay all the expenses). Even in "not for profit" organizations, if fund raising operations don't generate more than overhead expenses, the business model will eventually fail.

Sure there are exceptions, but for the most part, this four pronged focus will likely bring an element of success.

Our investment portfolios must be viewed as businesses, and we are the managers. If we look at them in this way, many of the "tried and true" lessons we have been exposed to over the years will become the tired and feckless mistakes of our investment past. In Chapter One (Wall Street 101) of "Brainwashing", I describe the investment portfolio as "a store filled with symbols", referring of course to the companies/products/services that the stock symbols represent.

In the early days of my investment history (the 70s and 80s), the individual securities I owned were the inventory on the shelves of my own little department store. When I slowly transitioned into Closed End Funds (CEFs), the securities on my shelves became diversified department stores in their own right, some specialized, some global, some mixed, and some uniquely specialized in one way or another.

Using Closed End Funds in your portfolio takes you from the small "mom and pop" shop on the corner to a giant conglomerate of professionally managed "profit centers". You become the CEO of a much larger enterprise... one in which you will own a piece of all the action out there. Think Amazon!

A store filled with symbols no more, our portfolios can become multi-national business centers filled with hundreds of "department stores"... diversified twice over in every possible sector opportunity available! And just as the managers of these varied enterprises strive to increase their quarter to quarter incomes, we have to do the same... to grow the productive value of our own multi-level enterprise.

· Businesses do not relish growth in the market value of their inventories; they strive for rapid inventory turnover at pre-set, profit targets.
· Businesses do not "buy and hold" on to their most popular products; they sell them for profit and restock their shelves to do it again.
· Businesses do not grow the enterprise by doing the same thing over and over again; they innovate, branch out, and take on new related (or not) businesses.

So our portfolio "business model" needs to become an actual business model. One that involves buying and selling at preset (but adjustable to current conditions) prices; one that trades actively and purposefully within an ever volatile and unpredictable environment; one that plans for higher prices when markets are falling and for lower prices when markets get crazy. And one that sticks with the four pillars of risk minimization (or business management): Quality, Diversification, Income, and Profit Taking.

If we start the year with 50 different quality products on our shelves, and we can sell 75% of them at a reasonable profit throughout the year, we'll be able to keep our heads above water. If, however, we can turn our entire inventory over several times each year, we can make a lot of money!

What's in your wallet?

 

© 2017-2019 Advisors Magazine. All Rights Reserved.Design & Development by The Web Empire

Search