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Traditional Portfolio Analysis 📜🏢

Before the 1950s, investors didn't use complex math to build portfolios. Instead, they relied on common sense and "Traditional Analysis." While simpler, this approach is still used by many conservative investors today.

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1. Pillars of Traditional Analysis

Traditional analysis is based on the quality of individual stocks rather than how they work together in a group.

  1. Safety of Principal: The number one rule is "don't lose the original money."
  2. Stability of Income: Traditional investors love regular dividends and interest payments.
  3. Capital Growth: They want the price of their stocks to grow steadily over long years.
  4. Liquidity: They only buy stocks that can be sold easily in the market.
  5. Marketability: Focusing on well-known, "Blue Chip" companies.

2. The Traditional Process

In the traditional world, building a portfolio looks like this:

  • Step 1: Selection of Quality Stocks: An investor searches for companies with a long history of profits and dividends (e.g., Tata Motors, HDFC Bank).
  • Step 2: Diversification by Industry: They make sure to buy stocks from different industries (Steel, IT, Banking) so they aren't hit by a single sector crash.
  • Step 3: Buy and Hold: Traditional investors rarely trade. They buy a good company and hold it for decades.

3. Traditional Constraints

Traditional analysis often ignores the correlation between stocks. If you buy 10 different bank stocks, you are "diversified" in the traditional sense, but if the banking sector crashes, your whole portfolio dies. This is where the traditional approach falls short.

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4. Why Use It Today?

Even though "Modern Theory" is more accurate, the Traditional Approach is great for:

  • Retired people who need safe dividend income.
  • Beginners who don't understand complex math.
  • Investors who believe in the long-term fundamental value of companies.

Summary

  • Traditional Analysis focuses on safety, income, and liquidity.
  • It prioritizes individual stock quality over portfolio statistics.
  • It follows a "Buy and Hold" philosophy.
  • Its main weakness is that it doesn't account for the mathematical risk of correlated assets.

Quiz Time! 🎯

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