14-Theories
Supporting Theories for the U.S. T-Bond Portfolio Management Program
Theory is Essential:
“Experience will answer a question and a question comes from theory. The theory in hand need not be elaborate. It may be only a hunch or a statement of principles. It may turn out to be a wrong hunch.
“Experience alone, without theory, teaches management nothing about what to do to improve quality and competitive position nor how to do it.” W. Edwards Demming, PhD: P. 19
The following theories form the basis of our U.S. T-Bond portfolio management program:
Theory # 1: There are three ways to make money, namely: sell your time, get someone else to work for you or have money work for you.
Theory # 2: Having money work is the most effective of the three ways.
Theory # 3: When one attempts to make money with money, great caution must be exercised to control risk or the money will be lost.
Theory # 4: Investment portfolios are established for the purpose of making money and preserving assets.
Theory # 5: A low risk investment program needs to be built around something constant and dependable.
Theory # 6: The only dependable constant we have been able to identify in the markets is the fact that time passes. It is impossible to predict market direction or the magnitude of a market movement. The events of 9/11 showed that “the markets being open” is not even a constant. Sometimes the markets are closed.
Theory # 7: A money management program can be built around this dependable constant of “time passing” by owning an asset that pays a dividend and/or by selling a decaying asset. The financial success of insurance companies is linked to the principal of “selling a decaying asset” in the form of insurance policies.
Theory # 8: The safest assets in the world to own from which to collect interest are US Treasury Bonds, US Treasury Notes and US Treasury Bills because they are backed by the full faith and credit of the U.S. Government. As long as we have a government, the interest payments will be made and the principal will be repaid when due.
Theory # 9: Of these three instruments, 30-year Treasury Bonds generally pay the highest yield. They also have the greatest risk of principal erosion when interest rates go up because higher interest rates will drop the value of 30-year Treasury Bonds more than the shorter-term Treasury Notes or Treasury Bills.
Theory # 10: Sophisticated hedging strategies utilizing futures and options on futures can be successfully employed to defend against erosion of principal in an escalating interest rate environment.
Theory # 11: The returns on a 30-year Treasury Bond Portfolio can be enhanced by utilizing the constant of “time passing” by selling a decaying asset which, in this case, will be options on the Treasury Bonds.
Theory # 12: In order to successfully enhance the yield on a T-Bond Portfolio, the following five skill sets must be developed:
1. Portfolio Construction
2. Portfolio Maintenance
3. Option Expiration Management
4. Portfolio Sizing and Risk Control
5. Emotional Control
Theory # 13: These skills are learnable/teachable skills.
Theory # 14: By employing these skills, a portfolio can be designed, constructed and managed so that it will be profitable when the market advances, when the market declines or when the market wanders aimlessly without any sense of direction.
Theory is Essential:
“Experience will answer a question and a question comes from theory. The theory in hand need not be elaborate. It may be only a hunch or a statement of principles. It may turn out to be a wrong hunch.
“Experience alone, without theory, teaches management nothing about what to do to improve quality and competitive position nor how to do it.” W. Edwards Demming, PhD: P. 19
The following theories form the basis of our U.S. T-Bond portfolio management program:
Theory # 1: There are three ways to make money, namely: sell your time, get someone else to work for you or have money work for you.
Theory # 2: Having money work is the most effective of the three ways.
Theory # 3: When one attempts to make money with money, great caution must be exercised to control risk or the money will be lost.
Theory # 4: Investment portfolios are established for the purpose of making money and preserving assets.
Theory # 5: A low risk investment program needs to be built around something constant and dependable.
Theory # 6: The only dependable constant we have been able to identify in the markets is the fact that time passes. It is impossible to predict market direction or the magnitude of a market movement. The events of 9/11 showed that “the markets being open” is not even a constant. Sometimes the markets are closed.
Theory # 7: A money management program can be built around this dependable constant of “time passing” by owning an asset that pays a dividend and/or by selling a decaying asset. The financial success of insurance companies is linked to the principal of “selling a decaying asset” in the form of insurance policies.
Theory # 8: The safest assets in the world to own from which to collect interest are US Treasury Bonds, US Treasury Notes and US Treasury Bills because they are backed by the full faith and credit of the U.S. Government. As long as we have a government, the interest payments will be made and the principal will be repaid when due.
Theory # 9: Of these three instruments, 30-year Treasury Bonds generally pay the highest yield. They also have the greatest risk of principal erosion when interest rates go up because higher interest rates will drop the value of 30-year Treasury Bonds more than the shorter-term Treasury Notes or Treasury Bills.
Theory # 10: Sophisticated hedging strategies utilizing futures and options on futures can be successfully employed to defend against erosion of principal in an escalating interest rate environment.
Theory # 11: The returns on a 30-year Treasury Bond Portfolio can be enhanced by utilizing the constant of “time passing” by selling a decaying asset which, in this case, will be options on the Treasury Bonds.
Theory # 12: In order to successfully enhance the yield on a T-Bond Portfolio, the following five skill sets must be developed:
1. Portfolio Construction
2. Portfolio Maintenance
3. Option Expiration Management
4. Portfolio Sizing and Risk Control
5. Emotional Control
Theory # 13: These skills are learnable/teachable skills.
Theory # 14: By employing these skills, a portfolio can be designed, constructed and managed so that it will be profitable when the market advances, when the market declines or when the market wanders aimlessly without any sense of direction.