Think aloud on the art/science of portfolio construction.

It's an area of learning I gravitate to.

Here's some

* bird's eye heuristics
* why I gravitate to it
* practical implementations
* a handful of follows
Birds Eye Heuristics

1. Geometric returns are what matter. This acknowledges how vol effects compounding.

E(Geo) = E(arithmetic) - ½ σ²

2. All assets are part of a higher-order class: convex or concave

3. Correlation is critical. But can be unreliable. Esp at the wrong time
Hedges come in various forms of dilution

1. The most reliable form of neg correlation is a put. You pay up for that reliability.

2. Trend strategies have a "speed" which gives them a moneyness. A slower signal is further OTM but costs less. Fewer whipsaws.
Why I gravitate towards port construction (which includes sizing)?

Alongside timing and security selection, port const rounds off 3 sources of alpha.

To me, portfolio construction seems like the highest impact expression to work on.
Why do I feel that way?

Long term timing seems impossible. Lots of studies using CAPE etc show how difficult this is on any serious timeframe.

While actually evaluating businesses looks like a life's work. Lots of domain expertise.

Port construction feels far more 80/20iable
Let's explore that a bit.

Investing is a game. Not a simple game. Capital, rates of return, laws. All variables in complex adaptive system. Don't fall for ludic fallacy, yada, yada.

But, let's relax that for a moment.
Let's say it is a game like coin tossing. Something that nags me is the sense that managers would not "get it right" even if the vols, correlations, and distributions were decreed by Oden. Like you can be a great stock picker but find a way to lose at tic-tac-toe. A solved game.
It's almost like there should be a license or a test for basic competence in the solved version of games. Sure, the real world isn't a game, but if you can't pass the version with an answer key how can I trust you in the wild with real money.
Practical implementations that prioritize portfolio construction?

Permanent portfolios, trend, hedged programs. Portfolios that don't care about what you think will happen. They have soft (correlation), hard (option), semihard😉 (stops) hedges.
Risk cannot be destroyed only transferred - @choffstein

You can lose quick or lose slow.
Tolerances are constraints.
Tradeoffs abound.

In my whatsapp chats, I see people obsessed with timing. Or trying to pick stocks. Inefficient focus imo. Higher noise to signal.

The "money math" section ends up hosting my exploration of these topics.

If you have favorite resources on these topics please share them. Especially interested in how port-construction- forward-methods have fared thru the latest chaos.
You can follow @KrisAbdelmessih.
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