Thursday, October 07, 2010

'alpha' and 'beta' - Analog Electronics and Portfolio Management

I remember during my poly days that one of my favourite subjects had been Analog Electronics. And the study of BJT (Bipolar Junction Transistor) bring much insights to me when managing my investment portfolio. Yes, transistor equations are quite complicated sometimes, but the basic concepts are quite simple to understand.

One of the basic concepts in transistor theory is DC basis, which analyzes the BJT when it is operating in DC. And to measure DC efficiency, we often use 'alpha' and 'beta', which is basically the ratio of DC collector current over emitter current and the ratio of DC collector current over base current respectively. 'beta' can actually varies widely while 'alpha' is almost equal to one in most cases. By looking at 'alpha' and 'beta', we can actually have an idea of whether the BJT is operating normally or not. We can then do the necessary adjustments to the design of the BJT to correct its mode of operation.

In investment portfolio management, we also need to understand 'alpha' and 'beta'. In fact, the key to successful portfolio management is to manage 'alpha' and 'beta' plus the other greeks well. When we add stocks into our portfolio, we need to have an idea whether we are adding it for 'alpha' or 'beta'. If let's say I think the market will be volatile and will go up, I might want to have more 'beta' in my portfolio. If that is the case, I will add more volatile stocks like NOL, Genting S'pore etc into my portfolio so that my portfolio will track the market up. However, if I am not sure about the market and think that there might be more risk of a downturn, I will want to add more 'alpha' into my portfolio by adding stocks like Bonvests, Hour Glass etc to protect my downside risk since these stocks don't actually track the overall market well. In either case, it is not about consistently buying and selling stocks to manage one's portfolio, but rather to adjust the "design" of the portfolio to reflect its risk profile with respect to your market outlook and investment objective.

My investment portfolio is my BJT transistor. 'alpha' and 'beta' are my indicators to make sure that my transistor is operating normally.

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Blogger ZhuKoLiang said...

wow wow wow!!! i really really like this post...

bcos i am studying from the same EEE field... and in terms of investment and EEE, i have a lot to learn from ghchua...

i read this post again and again... really is similar to my style (i like to use analogies to explain phenomenon).. there is quite some new insights i can learn from this post..

8:35 PM  
Blogger ZhuKoLiang said...


today u got go jaya agm or not?

5:37 AM  
Blogger ghchua said...

Hi newbie_george,

Nope. Had been quite tied up with work lately.

7:38 PM  
Blogger ZhuKoLiang said...


ask u huh, i attended agm...

the chairman says: resolution number1 ... . . . .. .. . .

chairman ask: "who propose the notion?"

then 1 or 2 raise up hand.

chairman ask the person's name, he identify himself.

then next, chairman ask: "who second the notion?"

nobody response..

then lastly, he say "who vote for the notion?" then many people raise up..

wana ask: what is the meaning of "who propose the notion?" and "who second the notion?"

11:20 AM  
Blogger ghchua said...

Hi newbie_george,

When a resoultion at the AGM is tabled for voting, it had to be proposed by a shareholder or proxy present and seconded by a shareholder or proxy present before it can be put to vote.

That is the reason why the chairman asked for a proposal and seconder for the resolution.

7:31 PM  
Blogger ZhuKoLiang said...

hi shifu,

then, whats the difference between "proposed" and "seconded"?

or, if a resolution is proposed and not seconded, then what happens?

if a resolution is seconded and not proposed, then what happens?

if a resolution neither proposed nor seconded, then what happens?

8:47 AM  
Blogger ghchua said...

Hi newbie_george,

The proposer placed the resolution on the table and the seconder supported it.

"if a resolution is proposed and not seconded, then what happens?"

It cannot go for voting, since there is no seconder.

"if a resolution is seconded and not proposed, then what happens?"

This cannot happen. The resolution will have to be proposed before it is being seconded.

"if a resolution neither proposed nor seconded, then what happens?"

Resolution will be withdrawn from the meeting and not available for voting.

10:18 PM  
Blogger ZhuKoLiang said...

hihi shifu,

ask u... recently in the past 1-2years, especially during the 08crisis, i slowly accumulated some counters...

today i slowly reach 30counters. however, i find it increasingly more difficult to look after these counters...

i find it a hassle to go through the announcement page 1by1 in the sgx website and be aware of their happenings.

pls advise me. or, i do not have to do all these at all?

i treat all these 30counters as my "babies", and i feel there is a need to go through their announcements, understand wat is going on.. however, if my number of babies grow more and more, say 100babies, i am afraid i am too overloaded to go through all of them one by one.

pls advise..

4:53 AM  
Blogger ghchua said...

Hi newbie_george,

As your portfolio gets bigger and more diversified, there is no need for you to monitor each and every announcement at SGX website for your companies, since you have already minimize company specific risks. What you need to do is to have an overview of your portfolio and see how to "tune it" so that it suites your investment objective.

Just like when you are building up a circuit, there is no need to check whether each and every of your component in the circuit is functioning well every time. It is only when something is wrong that you start to troubleshoot, isolate the fault and solve the problem. Of course, you need to do preventive maintence but it is not everyday that you are going to do that.

6:09 PM  
Blogger ZhuKoLiang said...


then do u at least look into all ur each holding's quaterly financial statement?

or the very least, annual report?

wat i mean "look" is really sit down, 1by1 and analyse..

10:29 AM  
Blogger ghchua said...

Hi newbie_george,

Definitely. You can read up on whatever that you want during your free time. But what I am trying to say here is not to over-react based on these reports. You have to form a portfolio view of your holdings, and not to do excessive buy/sell trades just based on quarterly or even yearly company reports.

Personally, I have only done one sell trade this year and only less than 5 sell trades last year. And I am cool about it as it meant that my portfolio turnover rate is not very high.

Portfolio management is not only about looking at individual companies, but it is also about what you need to do to your portfolio to make it better. If something is bad in your portfolio, you might choose not to get rid of it if it doesn't affect say 99% of your portfolio performance. There is no need to sell each and every bad company in your portfolio if it is well-diversified. Rather, you should spend your time to consider what to add into your portfolio to make it even more better than getting rid of those bad companies.

I know it sounds abstract but that is the way I manage my investment as I maintain a portfolio view of all my investments, rather than going into small details of each individual companies. Sometimes, it pays to look at the overall picture rather than to micro-manage.

I hope that I have cleared some of your queries.

7:04 PM  
Blogger ZhuKoLiang said...

thank you extremely much sifu to explain to me bit by bit. i have understand much more.

just 1 question, how do u view your entire portfolio?

Say for a circuitry, we view the overall circuit via the circuit diagram drawn on paper.

Say for a software, we use a flow chart to illustrate what the software is doing.

But here, for a portfolio, how do we view it entirely? of cos not by logging in to CDP and visually look. which i believe is ineffective especially if u have hundreds of stocks.
--> I was thinking of making a pie chart to view my ENTIRE portfolio, like: currently now 21%property, 20%reits, 30% S chips, etc etc...
--> then from here i use ur method to finetune so on and so for..

Back to my first question: How do we look visually at our entire portfolio? (other than in CDP) or how do we model our portfolio? (jz like our software engrg lecturer saying model ur software)

I need to model/visualise my portfolio first, before adding in feedback, alpha beta into my feedback amplifier.. :)

Kindly advise..
(thank god sifu is EEE, else very hard to explain)

10:21 AM  
Blogger ghchua said...

Hi newbie_george,

Ok. I will try to explain using EEE terms, since I am an Electrical Engineer by training.

For circuits, it is not really neccessary to look at the circuit diagram. That's why people model them using Control Engineering concepts and two port networks for Power Engineering. What it meant is that you look at the system response and see whether it is stable or not. Only when you need to go into details to troubleshoot a fault that you start to look at circuits.

For software engineering, it is similar. I can just look at the stack trace of the program and see where is the bug. Only when I need to narrow down the problem and then I go and look at the design, which is where the flowchart comes in.

For investment portfolo management, you can roughly look at your CDP statement and look at its total portfolio value. Have a rough idea of how the portfolio performs (not on a day to day basis but maybe once after a few days) and you will roughly know how volatile it is. I don't really use pie chart, excel spreadsheet or anything like that. I prefer to keep things simple.

11:31 PM  

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