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
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
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.
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.
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
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.
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.
There should be a test for portfolio constructors to design optimal strategies for a given set of constraints/inputs. Or just a get a passing mark on @EconomPic polls.
If I'm overreacting, I'd recall that allocators get fees wrong. https://moontowermeta.com/do-professional-investors-understand-fees/
If I'm overreacting, I'd recall that allocators get fees wrong. https://moontowermeta.com/do-professional-investors-understand-fees/
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.
Permanent portfolios, trend, hedged programs. Portfolios that don't care about what you think will happen. They have soft (correlation), hard (option), semihard

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.


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.



Must-follows to explore these ideas:
@movement_cap
@demonetizedblog
@EconomPic
@breakingthemark (rebalancing work is
)
@choffstein & @theNFaber
@MebFaber
@ArtemisVol
@investingidiocy
@ReformedTrader
@GestaltU & @MikePhilbrick99
@movement_cap
@demonetizedblog
@EconomPic
@breakingthemark (rebalancing work is

@choffstein & @theNFaber
@MebFaber
@ArtemisVol
@investingidiocy
@ReformedTrader
@GestaltU & @MikePhilbrick99
My posts (my attempts to grok the deeper-researched work of the folks i mentioned):
https://moontowermeta.com/how-tails-constrain-investment-allocations/
https://moontowermeta.com/your-portfolio-intuition-is-poor/ https://moontowermeta.com/lesson-from-coin-flip-investing/
https://moontowermeta.com/how-tails-constrain-investment-allocations/
https://moontowermeta.com/your-portfolio-intuition-is-poor/ https://moontowermeta.com/lesson-from-coin-flip-investing/
The "money math" section ends up hosting my exploration of these topics.
https://moontowermeta.com/category/newsletter-thoughts/the-money-angle/money-math/
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.
https://moontowermeta.com/category/newsletter-thoughts/the-money-angle/money-math/
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.