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Managing Large Portfolios

 
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arthur
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PostPosted: Sun May 22, 2005 10:55 am    Post subject: Managing Large Portfolios Reply with quote

There are many ways to manage portfolios. However, there are few ways to manage portfolios optimally. Few people realize, for example, that Warren Buffett trades options, stocks, commodities, junk bonds, currencies, etc. Buffett didn't make over $40 billion in financial markets just buying and holding stocks, e.g. AXP and KO. Great traders are great jugglers. No one can copy Buffett, because no one can juggle as much and as well as Buffett.

I normally keep about 90% of my options portfolio in cash for several reasons, including (the use of) leverage, flexibility, and safety reasons. I find it interesting that by risking only a small part of a portfolio in options, the total portfolio can double in a year.

I was on a "winning streak" from Dec '04 to May '05 roughly doubling my portfolio in that time, while risking around 15% on average in options. If I would have risked 25% to 50% instead, I may have tripled my portfolio, in less than six months.

However, risking a larger proportion wouldn't have been optimal, because if 50% of my portfolio was at risk, for example, and the winning streak ended much sooner, I could have lost all the gains I made in several months within a few days.

So, I kept my portfolio heavy in cash, and when the market did what I didn't expect, I lost only one-quarter of my gains. Moreover, I believe, my portfolio is currently in an excellent position to recapture those lost gains quickly (which I'll update in this article within a week).

There's an old Wall Street saying: "The market can remain irrational longer than you can remain solvent." That's why I've kept my portfolio heavy in cash, just in case of an irrational episode, to protect most of my gains.
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