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Portfolio Analysis: Igniting a long-term spirit in a short-term world (III). Don´t put all your eggs in one basket.

Today we will continue by exploring the roots of portfolio analysis. From where on earth is the “diversification” term coming from?

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Have a beautiful day. Let´s begin.

The roots of portfolio analysis are not linked to this century, in which the science of management formally begun. Officially, strategic management started as a discipline of management, to be studied at University programs just around 100 years ago. Such a young formal period of time isn´t it?. Before the First World War, the acquisition of wealth was merely through subjugations as a result of love, war, and a struck of fate or luck. Kingdoms and their extensions (or expansion) were merely reached by matrimony, by heritage, by conflicts and conquering, and by the good fortune of merchants and trade.  But in the middle of all, portfolio analysis was suggestively done. Everything started with the earliest civilizations before the Christ Era. Each of the civilizations as we know them (the Celts, Egyptians, Romans, Mesopotamian, Aztecs, Mayans, and Incas cultures) performed portfolio analysis, without knowing they were doing such analysis, and they were exactly analyzing cleverly, without calculators, without excel sheets, without artificial intelligence. They knew by heart which were the most important performance success factors for survival: time, natural phenomena, and wars. Regardless of the type of money used by our ancestors´ commerce or transactions; if bartering or coins of gold and silver; our predecessors understood better than us, that any type of economic flourishing in any type of industry, could be barred by the effects of time; by natural disasters, such a storm, a tsunami, an earthquake, a diluvium, iciness, drought or volcano eruptions; and by wars or conflicts created in between them.

“La Pureté Virginale”. An aquarelle painted by Eleonora Escalante. Paper: Fabriano Traditional White 300 GSM Grana Fina. Size: 15 inches x 22 inches.

The roots of portfolio analysis are based on the story of us. As simple as that. We will take a pew with our roots of portfolio analysis bestowing the lens of the “life-history” theory. The “life-history” theory is a framework that has been developed to understand how organisms allocate resources across the life span (Kaplan and Gangestad, 2005; Roff, 2002 and Stearns, 1992). What took my attention about this “life-history” theory is that it has been in front of us, and we couldn´t frame it properly until recently (1).

“The Life-History Theory” explains how organisms navigate resource-allocation trade-offs. This framework suggests that diversification may be adaptive or maladaptive depending on one´s life-history strategy and that these differences should be observed under conditions of threat or uncertainty. Eleonora Escalante Strategy is simply connecting the dots between the life-history theory and the roots of portfolio analysis which is the concept of diversification represented in the phrase “Don´t put all your eggs in one basket”.

According to life-history theory (1), all organisms and institutions (starting with the microbial, animals, flora, humans, organizations) face fundamental trade-offs in the allocation of limited resources to growth, maintenance, and reproduction across their life span.  The best allocation strategy for each organism can vary as a function of the local ecology (which includes the socio-economic status or SES) and early life- experiences. The latter means that each organism describes its own life-history strategy varying along a continuum that could be fast or slow.  

  1. Fast life-history strategies make sense with organisms of more rapid, physiological and sexual development; resulting in more offspring and reduced parental investment in each descendant. In addition early-life environments characterized by high levels of unpredictability and harshnes lead organisms to enact faster by speeding up the timing of physiological development and sexual maturation. Creatures raised in scarcity (in the case of humans, with lower Socio Economic Status or SES) respond to mortality threats by becoming more impulsive, engaging in more risk seeking behavior, and wanting to start a family sooner, faster and quickly.
  2. Slow life-history strategies are associated with slower physiological and sexual development, resulting in fewer offspring and greater parental investment in each progeny. Conversely, when external causes of mortality can be managed, slower strategies are associated with delaying reproduction and investing in future outcomes as a natural advantage. Organisms raised in abundance of resources of great quantity or wealth (with higher childhood SES settings), respond to mortality threats by becoming less impulsive and more risk averse, that sense of security triggers to delay starting procreation.

Where does diversification connect with the “life-history theory”?
Diversification is linked to the “life-history theory” of fast and slow organisms strategies when it comes to the word survival. All of us, all the organisms living on this planet are born to survive facing adverse or favorable conditions. And all of us, naturally or not,  adopt bet-hedging strategies to shield against the failure of reproduction and failure of not succeeding. We all want to defend and guard against situations in which we won´t be able to cope with the adverse conditions that will come up during our lifespan. If organisms are living under faster strategies, they will use a bet-hedging that is diversified. If organisms are living under slower strategies, with plenty of abundances or survival resources, they will choose for the bet-hedging that is conservative.

Bet-hedging strategies are a sign of diversification. Let´s understand this with several examples (1).

  • Herders in East Africa facing the uncertainty of drought must decide whether to invest in a smaller quantity of large-stock animals (camels, for example) or a larger quantity of small-stock animals (goat and sheep). Investing in small-stock animals reflects a diversified bet-hedging strategy because these two species require less initial investment and have higher reproductive rates. By contrast, investing in large stock animals reflects a conservative bet-hedging strategy, buying camels is more expensive, but these are resistant to drought for the long term. That is how we understand in history, why pastoralists adopted a high diversification strategy (goats and sheep) in contrast to a low diversification strategy (camels), and this depended on their SES or wealth. Poorer households adopt a high-diversification strategy by investing in many small animals, meanwhile wealthier households adopt a low-diversification strategy by investing in a few large animals or only one type of stock which is more expensive to buy.
  • Entrepreneurs without money which represent the 84% of the global population (middle class and below according to Eleonora Escalante Strategy estimates), utilize diversified bet-hedging in order to manage the possibilities of total business failure during their lifespan.  It is not feasible for those of us who live with less than a family income of US$ 175,200 dollars per year or less, to invest everything in one single business. Given the uncertain future circumstances, it is normal to spread our resources in multiple businesses.
  • Oysters and lobsters in Maine: The state of Maine in the USA, is one of the most beautiful and fertile locations of the East. Maine has had an abundance of resources and conditions that allow the growth and natural pristine cultivation of the best-tasting oysters and lobsters all over the world. Native Americans captured wild oysters from the Damariscotta River, and these organisms live in plenty of a conservative strategy that permits them to grow to taste unique. “Maine’s frigid, clean ocean waters and strong tidal movements are ideal for oyster growth. Moving plankton, nutrients, and trace minerals, as well as the purity of the cold waters, minimizes diseases found in Southern warmer water oysters – even as close as Southern New England. Oysters grow much slower in these colder waters, often taking 3‐4 years to become market-sized, compared to the Gulf of Mexico oysters that often only need 1 year. This increased growth time allows the oysters to mature longer and have a greater depth of flavor. The cultivated Maine oyster’s adaptation to the cold, even freezing, waters results in harder shells with deeper cups ‐ the ideal “served on the half‐shell” delicacy”(5).
  • Do not put all your eggs on the same basket: This phrase is the root of diversification and portfolio planning. This is a piece of advice which means that one should not concentrate all efforts and resources in one area as one could lose everything during uncertain times. The origin of the phrase is unclear, but it is most commonly attributed to the book Don Quixote written by Miguel Cervantes in the early 1600s (2). In the novel Don Quixote, it is written: “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” This expression comes from the notion that if you gather all of the eggs that your chickens have laid into one basket (or container), and you drop this unique basket in your way home, you will break all the eggs and therefore lose all you have (3).

Given the nature of the pandemic, and reading the “life-history” theory, this event has affected rich and poor, faster life-history individuals and slower conservative ones; then the diversification rationale is notably more important today than ever before.  In the case of humans who created wealth by following the core competence theory, it is important for them to begin to diversify. These entities will need to diversify, particularly those related to the tech industries, which are in clear disadvantages for survival. Even though it seems they have won during the pandemic. No one can survive by living with technology only, because the tech foundation is on electricity (energy) and without it, our survival is zero. Food (water and crops) and shelter are crucial. If we wish to survive another situation like another worst epidemic, compared to the one that we have been experiencing, we must procure diversification. No matter what social-economic status (SES), the diversification path deserves to be discovered. No matter if rich or middle class or poor.

There is only one exception to the rule of diversification. That is when we settle to marry for a long-term relationship with our chosen partner. Once we commit to being faithful and loyal to one person by accepting a marriage proposal, and we make the promise to come true into matrimony, then, that is the only exception in which we can put all our feelings in one basket. May the love of God remain in each of us to keep our committed relationships thriving.

Enjoy Stacey Kent music for today´s chapter (this song is the exception for diversification):

Thank you for reading to me. As usual, blessings and only the best. Truly yours, Eleonora.

Sources of reference utilized today:
(1) White, Andrew; Li, Yexin, Griskevicius; Vladas, Neuberg, Steven; and Kenrick, Douglas (2013). “Putting All Your Eggs in One Basket: Life-History Strategies, Bet Hedging and Diversification”. Association Psychological Science. Sage Publications. Volume 24.  Issue 5. Page(s): 715-722

Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.

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