Last Wednesday I was stuck in traffic on a small residential road.
To escape, I took a little righty lefty on to a parallel and more major road. Even worse, I did what any good gambler does, and doubled down. Another righty lefty, and it was just as bad, and even longer to get back to my route.
I was somehow much further from home, and all told it probably added 20 minutes to my journey time.
I made two classic errors. Firstly, I was greedy. The residential road was slow but moving, and I thought I could be clever and save a couple of minutes.
Secondly, I doubled down. Having been lured into a greedy mistake, I thought well now I’m definitely going to be late, so I might as well risk it. Wrong – I’d much rather have been five minutes late than twenty, which is how I ended up. Lessons which reminded me of investing at the time…
Luckily though, I had a very interesting podcast to listen to – Chris Cole of Artemis was talking about his Dragon Portfolio.
Very similar though more advanced than our concept of true diversification here at UK Uncensored, it tries to protect an investor from a hundred years of market cycles.
He argues that most investors are aligned with strategies based only on data from the last 40 years – a period which is one of the most extraordinary in the history of markets. Falling inflation and falling interest rates have been a garden of Eden for financial assets of all kinds, and everything has gone up together. This isn’t normal, he says.
Something like 90% of all gains between the early 1900s and today have come since 1982.
Here’s the S&P 500 since 1926, for example:
His Dragon Portfolio is made up of five equal parts.
Cole writes that what makes it different is that it diversifies not by geography or sector, but by regime factor – so instead of US/UK/Japan, or energy/tech/financials, it protects against inflation, commodity cycles, currency devaluations, or growth.
That’s how it plans to survive for a hundred years – not just the last 40.
Equities – for secular (structural, long-term) growth.
Quality bonds – for periods of falling interest rates/inflation.
Fiat alternatives (gold, other precious metals, maybe crypto) – for inflation.
Commodity trend-following strategies – following the long commodity cycles.
Long volatility strategies – which benefit from bursts of volatility/market turmoil.
This is a truly reality-agnostic approach – saying that we cannot know a single thing about the future, but that if we buy these five factors in equal measure and rebalance them every so often (three or six months), we will gradually build long-term wealth with few, if any, significant drawdowns.
Taking 2020 as an example, as he does in his latest paper Rise of the Dragon, Cole outlines how the portfolio performed during a year which saw almost all parts of a market cycle.
A market crash – where many things suffered, but the long vol strategies exploded in value, outperforming the losses from the other factors.
Then, over summer we had an equity rally and a massive fiat devaluation with all the stimulus bills announced – so equities and gold rushed higher.
Then in autumn and winter, commodities picked up as inflation fears grew.
All told, there was no correlated downturn for the strategy, while 60/40 portfolios, most mutual funds or risk-parity strategies saw drawdowns of 30-40% at various points.
The imaginary Dragon Portfolio, meanwhile, saw a return of +52% for the year.
It’s a lesson in what a truly diversified portfolio can offer.
Our nuance here at UK Uncensored is to pretty much leave out bonds – as we see an inflationary regime coming which will decimate a 40-year long bull market in bonds.
But that carries risk, as it’s a forecast and could be mistaken.
Long volatility strategies are highly advanced, professional strategies using options and are very hard for most non-professional investors to access. The simplest form is to own an inverse exchange-traded fund (ETF) – if the stock market halves it should double, counteracting some losses.
It doesn’t deliver the 5x-50x gains that some long vol strategies can offer in times of duress like last March, but it’s a start.
Otherwise, growth, value, gold, and other fiat currency alternatives… it all sounds like my kind of stuff, and its result in 2020 emphasises the value of the strategy I have been suggesting over the past year.
At the very other end of the investing world…
Expletives, implosions, crypto, and Twitter
Watch out – bitcoin dipped over the weekend. This is a concern, given my belief in a broad speculative trend across multiple exciting assets.
Breaking down from short-term support levels, as the chartists might say, is not a good sign.
It’s correlations to things like the ARK Innovation ETF or Tesla that give me pause for thought.
To me, they are all suffering under the looming shadow of inflation. Last week saw surging inflation figures in the US, and higher interest rates on bonds have been hitting these US tech/growth sectors hard since January of this year.
Everyone is looking to blame Elon Musk, but I wouldn’t be so sure. It’s part of a broader speculative phase that is now fading.
I am still a long-term believer in bitcoin, but for now I’m nervous. Proceed with caution, and don’t forget, you don’t go broke taking a profit. It may well surge, I started the year with a 120k price target within this year, and that’s still entirely possible, sooner or later.
With a large, mainstream bubble (cross asset tech/speculation – Tesla, GameStop, crypto, unprofitable tech) deflating, the question is whether other segments of the markets – global equities or other factors like value – can survive/thrive without the tailwind of US tech/growth.
Such is the way of the crypto world though, that the Elon narrative is much more significant that upside surprises in inflation data (the former is more meme friendly and more polarising).
As a result, things are happening.
Things like a new cryptocurrency called… believe it or not… “F***ElonMuskCoin”.
It was up 100X in 24 hours. Silly. I’ll stick with the Dragon Portfolio, me…
You can find the chart on a website called PooCoin and I just have no words for how I feel about all this.
I wish the crypto enthusiasts doing all this cared as much as I did about the anti-inflationary criteria of their beloved technology.
Sadly though, I can’t imagine the crypto warriors making coins like F***HedonicAdjustmentsCoin or F******IncludeHousePricesInCPICoin or, simply, F***InflationCoin…
Although wait, isn’t that last one just a rude version of… bitcoin? Food for thought…
Crypto has so many amazing things going for it. My colleague Sam Volkering speaks better than anyone on the myriad of applications and solutions in the space, and the incredible developments happening outside of the limelight.
For me, Elon Musk’s involvement has been a distraction from what’s really going on – a digital asset and blockchain industry emerging from nothing, at great speed. Follow Sam at Exponential Investor to find out more.
It also reveals that he is a tourist to most areas of expertise.
With cars, batteries, solar, lithium mining, space exploration, and now crypto, experts in these fields find that he comes barging in, making stupid claims, using bad grammar and long words and big ideas to sound like some kind of visionary, whereas really he is simply a marketing god.
That’s fine – that’s enough to build an incredible impressive, world-changing electric car revolution. And he built PayPal from scratch and is clearly brilliant.
But excellence in one field does not mean excellence in another, and we’d do well to remember that.
Sam, however, is an expert in the field of cryptocurrencies, and anyone with any interest in taking a stake in the crypto markets beyond bitcoin, or understanding more about what’s happening, should one million per cent sign up to Exponential Investor.
Otherwise, I just hope everyone’s well and enjoying the slow but steady return of normality, long may it last.
Editor, UK Uncensored