Strategic Investment Mixology:Finding the Holy Grail Cocktail

So what do your Investment Manager and your neighborhood bartender have in common, other than the probability that you spend more time with the latter during market corrections? Antoine Tedesco, in his "The History of Cocktails" article, lists three things that mixologists consider important to remember and to understand when making a cocktail: 1) the base spirit, which gives the drink its main flavor; 2) the mixer or modifier, which blends well with the main spirit without overpowering it; 3) the flavoring, which brings it all together.

Similarly, your Investment Manager needs to: 1) put together a portfolio that is based on your financial situation, goals, and plans, providing both a sense of direction and a framework for decision making; 2) use a well defined and consistent investment methodology that fits well with the investment plan without leading it in tangential directions; 3) exercise experienced judgment in the day-to-day decision making that brings the whole thing together and makes it grow.

Tedesco explains that new cocktails are the result of experimentation and curiosity; that they reflect the moods of society; and that they change rapidly as both bartenders and their customers seek out new and different concoctions to popularize. The popularity of most newbies is fleeting; the reign of the old stalwarts is history--- with the exception, perhaps, of "Goat's Delight" and "Hoptoad". But, rest assured, the "Old Tom Martini" is here to stay!

It's likely that many of the products, derivatives, funds, and fairy tales that emanate from Wall Street were thrown together over "ti many martunies" at Bobby Van's or Cipriani's, and just like alcohol, the addictive products created in lower Manhattan have led many a Hummer load of speculators down the Holland tubes. The financial products of the day are themselves, products of the moods of society. The wizards experiment tirelessly; the customers' search for the Holy Grail cocktail is endless. Curiosity kills many retirement plans.

Investment portfolio mixology doesn't take place in the smiley faced environment that brought us the Cosmo and the Kamikaze, but putting an investment cocktail together without the risk of addictive speculations, or bad after tastes, is a valuable talent worth finding or developing for yourself. The starting point should be a trip to portfolio-tending school, where the following courses of study are included in the Investment Mixology Program:

(1) Understanding Investment Securities. Investment securities can be divided into two major classes that make the planning exercise called asset allocation relatively straightforward. The purpose of the equity class is to generate profits in the form of capital gains. Income securities are expected to produce a predictable and stable cash flow in the form of dividends, interest, royalties, rents, etc.

All investment securities involve some form of risk, but risk can be minimized with appropriate diversification disciplines and sensible selection criteria. Still, regardless of your skills in selection and diversification, all securities will fluctuate in market price and should be expected to do so with semi-predictable, cyclical regularity.

(2) Planning Securities Decisions. There are three basic decision processes that require guideline development and procedural discipline: what to buy and when; when to sell and what; what to hold on to and why.

(3) Market Cycle Management. Most securities portfolio market values are influenced by the semi predictable movements of several inter-related economic cycles: interest rates, the IGVSI, the US economy, and the world economy. The cycles themselves will be influenced by Mother Nature, politics, and other short-term concerns and disruptions.

(4) Performance Evaluation. Historically, Peak-to-Peak analysis was most popular for judging the performance of individual and mutual fund growth in market value because it could be separately applied to the long-term cyclical movement of both classes of investment security. More recently, short-term fluctuations in the DJIA and S & P 500 are being used as performance benchmarks to fan the emotional fear and greed of most market participants.

(5) Information Filtering. It's important to limit information inputs, and to develop filters and synthesizers that simplify decision-making. What to listen to, and what to allow into the decision making process is part of the experienced managers skill set. There is just too much information out there, mostly self-motivated, to deal with in the time allowed.

Wall Street investment mixologists promote a cocktail that has broad popular appeal but which typically creates an unpleasant aftertaste in the form of bursting bubbles, market crashes, and shareholder lawsuits. Many of the most creative financial nightclubs have been fined by regulators and beaten up by angry mobs with terminal pocketbook cramps. The problem is that their concoctions include mixers that overwhelm and obscure the base spirits of the investment portfolio: quality, diversification, and income.

There are four conceptual ingredients that you need to siphon out of your investment cocktail, and one to add: (1) Considering market value alone when analyzing performance ignores the cyclical nature of the securities markets and the world economy. (2) Using indices and averages as benchmarks for evaluating your performance ignores both the allocation of your portfolio and the individuality of the securities you've selected.

(3) Using the calendar year as a measuring device reduces the investment process to a short-term speculation, ignores all financial cycles, increases the emotional volatility of the investment markets, and guarantees that you will be unhappy with whatever strategy or methodology you employ. (4) Buying any type or class of security, commodity, index, or contract at historically high prices and selling high quality companies or debt obligations for losses during cyclical corrections eventually causes hair loss and shortness of breath.

And the one to add--- The Working Capital Model.

Cheers!