A Different Type Of Portfolio Construction

I bought my first piece of stock when I was 14, with money I earned from my paper route (Trimble Navigation if you are wondering, which has an IRR of around 9.5% CAGR at this point).

When I was a 19 year old infantryman in the Marines I had disbursing make automatic payments for half of my $450 paycheck to Janus mutual funds (which were the hottest thing going in the run up to the tech stock Chernobyl of 2000-2002). When other guys were covering their bodies in ink and buying Camaros, I was bumming rides and eating at the chow hall. You know those mutual fund prospectus disclosures your money manager mails you that go right in the trash. I poured over those for days.
Lest you think I am the world’s biggest buzzkill, when I left active duty in 2002 I ended up (in reaction to a hiccup in my relationship status) selling all the mutual funds I owned and buying an Audi and re-tooling the suspension with the help of a buddy, kissing that pot of money good-by.

Since that time I have tried trend-following, indexing, buy and hold, buying call options and selling puts. Moving averages, Fibonacci levels, retracements, and fundamental analysis. FAANG stocks, blue chips, high dividends, and REITS. I have been down every road, and always with my own money.

I have come to one inarguable conclusion (because if you want to start an argument, get a Warren Buffet buy-and-holder in the room with…well…just about any other kind of investor). Investing is hard, and all your heels-dug-in opinions and back tested strategies are fine until the first time the tape turns red.

Given any set of market conditions a couple different strategies are both workable and (hopefully) will yield better than index returns.

My opinion is that its not the 10 stock portfolio vs. the S&P 500 (and not the DOW, NASDAQ, or any number of other indices for some reason) that is the key question. Its not FA vs. TA vs. buys and hold. It’s not Warren Buffet vs. a hedge fund.
I can build a back-testing model that 100% proves my stock picking strategy is superior in every way. Every way that is, except in real life. Back testing and quoted rates of return have zero to do with how much money is in your account at the end of the next quarterly statement.

The real key is to have other, non-correlated strategies, that don’t rely on the stock market at all. It is about having assets and asset classes spread across multiple risk categories, that skew the overall direction of your portfolio upward.

So, instead of having a low risk asset that returns 3%, how about a zero-risk asset that returns somewhere in the neighborhood of 5%? What if we replaced a medium risk asset that returns around 7%, with a low risk asset that returns 10%? What if we have an asset that decreases in value but provides yearly income, allowing the asset time to recover its equity value?

All these different strategies will (hopefully) yield great pure dollar asset value but also reduce the amount of human behavior that is at the heart of 90% of all asset under performance. No one will ever be able to prove that in 20 years a 60/40 stock to bond split will outperform a 40/60 split, because the next 20 years may be the polar opposite from the previous 20 years.

Having non-correlated assets that grow when the sun shines and weather volatility better than an average stock market-based portfolio is what provides better sleep at night. If we can knock out some positive delta over a typical index fund so much the better.