Another Lesson in Portfolio Management

I've discussed the parallels between love/emotions and investments before. Somehow today, I feel like 3.33 a.m. is the perfect time to formalize my thoughts on the subject. Let's start with the basics:

Love = Money/Liquid Assets
Self-love = Cash reserves
Love for family = Treasury bonds
Love for friends = Diversifiable portfolio of value/growth/GARP investments in publicly traded securities
Incoming love from friends = Convertible bonds
Romantic love = High volume speculative trade for big swinging dicks
Marriage = Retirement plan
Lust = Day-trade
Casual acquaintances/Networking = Forex hedges

This is the story of portfolio manager X. Until the age of 12 or so, his portfolio consists mostly of treasury bonds along with a few forex hedges, with slowly building cash reserves. The excitement in the forex markets starts to make the treasuries look rather boring. This is when X decides he wants to test the real power of his cash and begins building his portfolio of investments. Some years X feels like a big swinging dick while in other more bearish years he settles for smaller positions in publicly traded securities, all the while building his appetite for risk. Then comes age 17-19 (college years) when he sees all his peers making big returns on big trades with the IT boom and general uptrend in GDP. He starts looking for the next sexy Microsoft/Google to put all his money in. After all, what good had diversification done him so far. The big money was in the speculative trades.


Treasuries are now hardly visible, and he's pulling his money out of the long-term investments because he thinks he's found his source for alpha. That year the markets gave him so much more than he'd dreamt of. On some volatile days, there were huge amounts to be made in day-trades. It was raining cash. He had so much cash now, that he was out hunting for more spec trades to invest in, and in the coming years there were many IT start-ups that he hand-picked to be queens of the markets.

Then the bubble burst. The markets that buried him in cash just like that, took it all away, just like that - with no respect for the investment strategies he thought he had perfected. All he was left with were a little bit of treasuries and some money tied up in the forex markets. The market recovers, but he doesn't. He's lost his nerve. Every time he finds a spec, his hands freeze up when it's time to pull the trigger. The next few years pass by, as he burns through his cash reserves and issues convertible bonds to survive. He spends his time looking through every stock screen he can get his hands on, looking for the next big thing - sometimes finding, never buying. His creditors keep telling him that spec trades aren't the only investments out there, that he should look for other sources of alpha.

Slowly, but surely at age 25, X begins to realize, that he doesn't have the stomach for specs any more. Day trades were not for him either - the teenagers on the trading floor could have those. X is now a well diversified value investor. The clean balance sheets afford him a sound sleep. But sometimes, just sometimes, he wonders if he might want to retire some day.