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Plus Unexpected Returns & Philip Pullman
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"Prophesy as much as you like, but always hedge."
—Oliver Wendell Holmes, 1861

Hey there,

Over at Mutiny Funds, we had a great conversation with Kris Sidial, Co-CIO at The Ambrus Group. We talked about "buy the dip" dynamics to markets, whether a hedged market can and opportunities for retail investors in areas that institutions will not touch.

If you enjoy or get value from The Interesting Times, I'd really appreciate it if you would support it by forwarding it to a friend or sharing it wherever you typically share this sort of thing - (Twitter, LinkedIn, Slack groups, etc.) You can read past editions here.

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Portfolio Charts

A nice write-up on one of my favorite topics: Shannon's Demon and rebalancing. Rebalancing seems like one of the most boring and least sexy finance concepts and it is, but it's also kind of amazing how well it works. Rebalancing a portfolio of uncorrelated assets allows you to achieve a better risk-adjusted return than the individual components - the whole is greater than the sum of its parts.

A great example from this piece: Consider the period from 1970 to 2010 where stocks had an annual return (AKA Compound Annual Growth Rate or CAGR) of 4.9% and gold had a CAGR of 4%.

Regularly rebalancing between stocks and gold generated a return of 5.8%, nearly a 1% annual premium over investing in the highest returning individual asset. The only free lunch indeed!


More Intelligent Life

One of my favorite childhood book series was Philip Pullman’s His Dark Materials. It was recently converted into a series by HBO which I watched and enjoyed. It made me start thinking about what made the books so good. The easy answer is that Pullman was a really good storyteller and he focused on the most classic of stories - the genesis one.

The secret to how he became a good storyteller? He told a lot of stories when he worked as a middle school teacher.

He believes all teachers should be able to tell a story "at a moment's notice to a class for the last quarter of an hour on a wet Friday afternoon". Not read it, he insists-tell it. "If you're reading out of a book all the time, nothing changes. But if you tell it face to face, you improvise a bit, you play around..."

He set about this task in a typically deliberate way. In the first term, he decided, he would do the births and deaths of the gods and goddesses, their natures and deeds; in the second term he would do the origins of the Trojan war, which would segue into "The Iliad"; and in the third term, he would do "The Odyssey". He prepared each week's story thoroughly so he could tell it without notes. He was teaching three separate classes, which meant telling each episode three times in a week. Again, the maths is impressive. "I must have told each story 36 times."

My other favorite line from the piece:

"My real life began", he says, "when I came home from the job and sat at my table and wrote three pages for the day."

Picture Perfect Portfolios

In a recent Twitter poll, investor Meb Faber asked "You get to choose only one to add to a traditional US 60/40 portfolio to increase risk-adjusted returns, what do you add?

The results were evenly split between foreign stocks, commodities/gold, managed futures (trend).


Using historical data, the answer to the question is Managed Future/Trend Following by a pretty large margin.

Why don’t more investors use Managed Futures/Trend Following in that case? This post gives what I think is the best answer: trend-following is complicated and kind of abstract.

The last reason trend-following isn’t more popular as an investing strategy has to do with its complexity relative to stocks and bonds.

What is a stock? A sliver of ownership in a company.

And bonds? Basically loans. Buy and hold em tight. Easy enough to understand right?

And how about trend-following / managed futures? An investment strategy that takes advantage of long, medium or short-term moves in various markets utilizing various techniques, calculations and time-frames while paying close attention to trade signals, current market price calculations, moving averages and channel breakouts to determine whether or not to go long or short.

In my experience, people have a legibility bias, they tend to like things that are simple and easy to understand. I think this is one of the reasons so many retail investors get into real estate. A house or apartment building is easy to see, touch, feel. It’s "legible" in a way that a systematic trading strategy like trend following is not.

In my opinion, most investors would do themselves a great service by taking the time to better understand more illegible strategies like trend following. When combined with an understanding of Shannon’s Demon and Rebalancing, it’s a particularly powerful concept.
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The Interesting Times is a short note to help you better invest your time and money in an uncertain world as well as a digest of the most interesting things I find on the internet, centered around antifragility, complex systems, investing, technology, and decision making. Past editions are available here.
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Futures and options trading involves a substantial risk of loss. You should therefore carefully consider whether such trading is appropriate for you in light of your financial condition. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author. The mention of specific asset class performance (i.e. S&P +3.2%, -4.6%) is based on the noted source index (i.e. S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self-reporting, and instant history.


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