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Investors Collaborative Premium Portfolio Report- March
Investors Collaborative Premium Newsletter - April 2024
Jacob Traut
May 18th, 2024
Welcome to March’s Report!
We’re going to take this nice and slow, plenty of foreplay before getting to the data.
Im going to be taking a different path with this going forward. Rather than the top/bottom 5, which feedback has shown to be unhelpful and counterproductive to what is being looked for. Instead, I'll be using the data we collect and gather to inform the creation of 3 different “portfolios” tailored to different risk profiles. The monthly updates will be reports on those specific portfolios, still accompanied by the ever-growing database of live strategies, as well as the database of strategies we’re evaluating for addition to the portfolio.
Thoughts on the direction? Opinions?
Love it?
Hate it?
Let me know!
As much as I enjoy writing about most anything, I enjoy providing useful information with my writing most of all!
So, lets start off with the “middle” of the pack in terms of aggression.
IC The Hawk and The Serpent
The first portfolio I’m creating is an homage to Artemis Capital Management, Harry Browne, and Mutiny Capital. Outside of “well known names, these 3 groups and individuals constitute some of my favorite writers and researchers on portfolio design, macroeconomics, and investing principles in general.
Chris Cole and Artemis Capital have written some of my favorite pieces on Volatility as a trade, as well as portfolio construction and macroeconomic trends. Two personal favorites being “Dennis Rodman, and the art of portfolio optimization” and “Moneyball for Modern Portfolio Theory”. Keep in mind, both were written well before Covid, and the associated effects on the stock market. Specifics they endorse are not necessarily the correct answers, but the overall.
A TLDR of each from chatGPT
The document from Artemis Capital Management LP titled "Dennis Rodman and the Art of Portfolio Optimization" draws an intriguing parallel between the unconventional basketball career of Dennis Rodman and modern portfolio management strategies in volatile financial markets. It critiques Modern Portfolio Theory (MPT) by arguing that traditional diversification, which failed during the 2008 financial crisis, needs reevaluation in today’s economic environment characterized by negative interest rates and aggressive central bank policies. Rodman, known for his vibrant personality and non-traditional playing style, exemplifies an effective but often undervalued asset. Despite his low scoring average, Rodman’s exceptional rebounding and defensive skills significantly enhanced his teams' performance, making him a crucial player in winning multiple championships. This sports analogy extends to financial strategies, suggesting that just as Rodman’s unique skills were critical during key game moments, investments in volatility can protect and potentially enhance a portfolio during market downturns. The document introduces "Rodman’s Paradox," illustrating how integrating seemingly underperforming assets, like long volatility strategies, can lead to greater overall portfolio efficiency and performance. It advocates for including defensive and non-correlated assets to improve risk-adjusted returns, particularly as markets face potential shifts, paralleling the underappreciation of defensive strategies in both basketball and investing.
The document "Moneyball for Modern Portfolio Theory" by Artemis Capital Management critiques the prevalent use of the Sharpe Ratio in investment decisions, highlighting its limitations and proposing a new approach for evaluating investment performance. The Sharpe Ratio, often used to measure risk-adjusted returns, fails to consider crucial factors such as correlations, skew, and liquidity. This oversight can lead to misleading assessments of portfolio robustness, particularly during market downturns, as the Sharpe Ratio does not account for how individual investments interact within a portfolio.
In response, the document introduces a more holistic metric, Cole Wins Above Replacement Portfolio (CWARP), which evaluates the true contribution of an investment to a portfolio’s overall performance, including aspects like return, risk, and drawdowns. This metric is inspired by "wins above replacement" from sports analytics, emphasizing the importance of contributions to team success over individual performance statistics.
Artemis argues for a shift in investment strategy evaluation, from focusing on individual asset performance as measured by traditional metrics like the Sharpe Ratio, to assessing how well an asset enhances the overall portfolio. This approach advocates for a more nuanced portfolio management strategy that prioritizes collective resilience and effectiveness over standalone investment merits.
The document suggests that the investment industry's reliance on outdated metrics can lead to sub-optimal portfolio constructions, advocating instead for modern metrics that reflect a comprehensive view of investment impact and promote more robust portfolio construction.
These two papers have heavily influenced the way I build “strategies” to be reasonably complete portfolios, or to fit a highly specific role, and excel at that role as best as possible. The end goal, in my opinion, should be to build yourself a maximally resource (money) efficient team of Dennis Rodmans. Spend as few resources as possible, but make sure that each of those resources contributes exactly what is needed at any given moment.
With the above information in mind, the following paper comes to mind on how to go about allocating your capital to achieve those goals across any and all market conditions.
The key takeaway is the classification and breakdown of market regimes and cycles. Growth, Decline, Inflation, and Deflation.
A bit of cursory thinking will give you a general idea of what does well in these scenarios, but Mutiny Funds has done the work of saving us from thinking by providing us a lovely infographic.
For MPT historians, or just market nerds, you may recognize the name “Permanent Portfolio.” Coined by Harry Browne, the original portfolio seeks to maintain its ability to go up, or at least stay flat in basically all market conditions by investing in long term bonds, short term bonds, equities, and gold. Thoeretically, something that will go up in all situations. It’s all well and good, results in a CAGR of roughly 7% according to Mutiny Funds research and number. Not bad, but we can surely do better with the technology available to us, wouldn’t you agree? Sure, there will be concessions in terms of maximum drawdown, but personally that is a trade I’m willing to make! I’ll take a 20% DD with an AR over 40% any day of the week.
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