Thursday, October 04, 2007

Agile Portfolio Management

Agile portfolio management is the first level abstraction of Agile values and practices up into the business.

Note here that we will be differentiating between agile and Agile. Specifically, agile refers to the ability to change and the ability to both manage and accept that change within operational activities. Agile refers to that family of methods and frameworks characterized by light touch management, iterative development, and Justin time planning. Some examples of Agile are Scrum, Lean, and XP.

Portfolio Management is a fairly common business term and refers the process by which some one or some organization actively “manages” a group of independent “variables” to better achieve some pre-stated “objective”. A really good example of this is a stock portfolio. Many of us have excess wealth that we are putting away for a rainy day (read retirement). Much of this wealth has been secured in financial “tangibles” – or various stocks. Usually under the watchful eye of a financial analyst (be it our self, our spouse, our best friend, or a hired gun) this group of tangibles are selected purposefully to both diversify (stabilize) our portfolio and to help achieve its objectives. Clearly, the objective is to maximize value growth; however, that is the simplistic response because each of us has a different tolerance for risk and a different set of values.

Some of us, closer to retirement, may opt out of those speculative rocket type growth tangibles because we innately know that what goes up (really fast) may also come down really fast (how many of us did not buy Google at $250 for this reason?). This group has a more conservative set of objectives termed wealth protection – a growth rate of 3-6% to keep up with inflation is sufficient to keep financial smiles affixed here. Others of us believe we can call the system, we are younger and more able and willing to gamble big. This group might liquidate savings to jump into a speculative opportunity in order to achieve a great payoff (say, buying Google at $250 to sell at maybe $500?). At any rate, here you are – a bunch of people with portfolios that are managed towards some prestated objectives.

Usually, though not always, those that achieve their goals are helped by a professional portfolio manager. More often than not, the unsuccessful ones are those that think they can do well enough as a part time manager, while they focus on other things (life, job, whatever). Success here is hit and miss. Interestingly, I would term these (all of these) as agile portfolios, here is why:

Periodically, perhaps not regularly though, each portfolio is examined to determine if it is operating towards the achievement of the stated goals and objectives. In fact, each of the stated goals and objectives are examined periodically to make sure they have not changed either. Usually, if the portfolio is not managed by a professional, these review events are based upon external stimulus: 60th Birthday, Birth of a child, Surprise bankruptcy of one of the portfolio companies, overt irrational exuberance relating to one of the tangibles, and so on.

The agility of the management happens in that the portfolio owners chartered their portfolio when they started and in the process of reviewing the goals and objectives they are acknowledging change, embracing it, and using it to help direct their actions. There are no mandated plans here. The inability to change individual tangibles for others with different specific attributes is not a given, but controlled only by the inability to get someone to accept your price for them in a transaction.

In Agile, we try to govern our projects using a set of values. The default values are
  • Individuals and interactions over processes and tools
  • Working software over comprehensive documentation
  • Customer collaboration over contract negotiation
  • Responding to change over following a plan
These have wide applicability – we can even apply them to our financial portfolio:
  • Listen to the current needs and desires of the owner of the tangible rather than being driven by their earlier stated plans. If they seem to be getting more conservative in their decisions, don’t program them into speculative buys.
  • Hardly anyone who owns a portfolio of stocks reads all the filings and reports that are available. Mostly, even the professionals work from fused data and trends when directing activity.
  • Clearly even professional managers are driven by their contracts and their contracts are usually written to protect them (limited or no liability for goal directed actions that tank completely), but successful managers get additional clients not through holding firm to the line, but by collaborating with their clients and seemingly understanding them, their risk tolerances. Successfully working with clients gets more clients – particularly if results are there too (but not, we said nothing here about successful achievement of goals).
  • Google looks good to $400, not just $300, let’s stay in a little bit further, if you don’t mind…….

I see a lot of nodding heads. Everyone agrees, internal consistency, etc. So how do we apply this? First, let’s identify some takeaways I think we can all agree to:

  1. These portfolios seem to generally do better with a professional manager than either a part-time or an amateur.
  2. Periodic re-reviews of both the objectives of the portfolio and the performance of individual tangibles must be accomplished.
  3. Professionals seem to manage portfolios better because they have less invested in individual decisions (I can’t sell this MCI, it will come back. I have to make back some of this loss!)
  4. Too much tinkering in the portfolio can cause unnecessary thrashing and increase fees substantially
I am sure there are more, but let’s leave it here for now!


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