Bitcoin’s NVT (network value/transaction) has been moving in a general upward trend since bottoming on Feb 6th. Here’s a chart using the great charting tools at coinmetrics.io:
Likewise, Willy Woo’s NVT Signal chart shows a similar pattern:
$BTC NVT is trending upwards after bottoming Feb 6. See chart from @coinmetrics. NVT Signal chart from @Woonomic shows similar pattern. #bitcoin
Continuing with our portfolio adjustments today and some more thoughts on portfolio allocation and risk ratios, which are highly dependent on target prices.
A target price is good for weighing risk/reward, but shouldn’t be used for decision making in terms of when to sell. Investments need to be reassessed before any of those decisions can be made. When we review individual stock investments, we consider a number of different factors.
As trend followers, we begin with reviewing the themes we’re following. If our outlook has changed on a particular trend, we’d look to get out of any positions that play into that trend.
However, we rarely change the trends we follow (we look for long term themes/trends) so that’s not often the case. Assuming the stock fits into our current themes, we look at the individual stock from both a fundamental and technical standpoint. We prefer undervalued businesses, but are more concerned with momentum over the previous 3/6/12 months. It’s tough to go against the crowd for a long period anyway.
Assuming we still like the business, we then assign a new target price and set a new stop loss to get a new risk ratio. These target prices tend to be realistic and optimistic, as we’ve already determined that we believe strongly in the theme and are now looking for the best case scenarios. Regardless of the new risk ratio, no action is taken until reviewing the entire portfolio.
After updating all holdings, we can then review how each stock plays into the portfolio as a whole. At times, we may see the need to add some risk by exchange particularly low reward positions for stocks with greater upside. By assigning both a target and stop loss price, it’s possible to quickly get a best/worst case scenario for the portfolio as a whole, making these decisions much easier than when looking at a stock in isolation.
NOTE: Howard Lindzon’s post about someone asking when to sell $600k worth of Bitcoin inspired my thinking about all the other factors that go into deciding when to sell outside of price. M
Continuing on our recent theme of structuring and building stock and alternative investment portfolios, I wanted to share a few thoughts on how risk ratios play into asset allocation.
When assessing any opportunity, it’s important to look at the best and worst case scenario, at least taken to a reasonable degree, then compare the potential gains versus the potential losses to get a risk ratio. Defining the downside is relatively easy stocks by setting stop losses set at a reasonable amount below the investment value.
In alternative investments, it’s not quite as easy as setting a stop loss sell price. To start, there’s the problem of valuing alternative assets. Values can only be considered estimates until a sale occurs, as prices often can fluctuate significantly in private asset sales. That leads to the second problem of a limited market of buyers for alternative assets. Alternative assets are decidedly less liquid than stocks, so when considering the worst case scenario, you need to consider the actual value if you needed to liquidate for cash within a reasonable amount of time. That time changes based on cashflow requirements, type of asset, and other variables that can be assessed on a case by case basis.
The upside is a relative guess for both stocks and alternative investments, though assets like real estate are typically much easier to estimate than a single stock or a single angel investment. In all cases, it’s important to come up with a reasonable estimate of the target value, should everything go right.
From there, it’s easy to get a risk ratio by dividing the potential gain by the potential loss. A high risk ratio means there’s more upside and implies the likelihood is decreased. While true, it’s important to account for how much capital is at stake and know how often you need to be right in order to win.
Working through these numbers before making an investment can help visualize how the investment plays into your portfolio, in terms of capital at stake, the worst/best case scenarios.
For our own investments, we set our numbers at the initial time of investment, then reassess occasionally by updating the target price, market/estimated value, low value, etc in a spreadsheet, based on any new information/developments. By using the spreadsheet, we get a chance to quickly reassess each investment and see how our assumptions affect our portfolio as a whole, potentially triggering other changes, including changes to our asset allocation.
Our own spreadsheet is based on Chris Perruna’s spreadsheets, which he included in a post on Position Sizing & Expectancy. Give that a read for more info.
We’re working on updating our portfolio tracking spreadsheet to work with a combination of stocks, crypto, and alternative investments. We’ll share a template when complete.
There’s been a lot of talk of markets being very expensive lately. This includes US stock markets, crypto, international stocks, venture capital, and many other markets. With everything being expensive, many have come to the natural inclination that a downturn must be imminent. The thought has certainly crossed my mind recently while working on our theme-based stock portfolio.
At some point, there will be a correction to all of these expensive markets. There’s no doubt about that. The problem comes in trying to guess when that may be, how far up it still has to go, and how far down it may tumble. Without knowing those three, there’s really no way to gauge when to enter or exit an investment. Of course, it’s not exactly easy to guess.
Some extremely successful investment managers like Jeremy Grantham and Howard Marks seem to think the markets are extremely risky, and have changed their portfolios accordingly. Many others, including Buffett, believe it’s foolish to try to time general market cycles, citing the risk in giving up potential huge gains while awaiting the impending crash.
We lean more towards the second line of thought, believing that the right investment can withstand negative shocks, at least to a better extent than the market as a whole, and that trying to guess what the market as a whole will do is a futile exercise. This thought process applies to our investments in public markets, as well as our private alternative investments.
Relating to the stock market, the style of ignoring market conditions works best when selecting individual companies rather than widespread market index funds. The more finite the selection (industry etf, specific stock), the greater the potential for either superior or inferior performance compared to the market as a whole, in the event of a widespread downturn.
As we work to build our theme-based portfolio, we are specifically looking for companies we believe provide room for significant upside while having a perceived lower downside compared to the market as a whole.
10 things investors can expect in 2018 – Ben Carlson
When things don’t make any sense – Ben Carlson
Stock Trends for 2018 – Chris Perruna
Bracing Yourself for a Possible Near-Term Melt-Up – Jeremy Grantham
How to Survive a Melt Up – Ben Carlson
Even with alternative investing in mind, many investors, including ourselves, keep some amount of capital in public market investments. There’s potential for considerable upside, though typically less than alternative investments. There’s no control of the investment, both in the sense that you can’t control the company’s performance nor how the market reacts, which may or not be in line with the company’s performance. Though the higher liquidity is nice both as a piece of mind and potential to get out of bad investments quickly.
There’s a number of ways to go about constructing a portfolio. From a basic perspective that including roboadvisors, human advisors, handpicking index funds, and handpicking individual stocks. Of course, it’s also possible to use some combination of these styles.
Personally, I’m not a big fan of losing control of where my money goes, such as the case with index funds. There are a number of companies with which I’d prefer not to be associated with, either for business or personal reasons, so I’d rather handpick individual companies, much like I do with individual alternative investments. In some cases, this isn’t feasible due to a lack of knowledge of individual businesses or difficulty in investing in specific businesses.
Actively selecting individual securities is a mostly outdated style, though the tools and info make it easier than ever to be informed and to act (buy/sell). For us, it’s about investing in good companies in trending areas ripe for growth. The themes were following for 2018 include:
The next step is to find companies working in these themes. They may not be 100% focused, but should a leader in that area, giving them room for substantial growth as the market grows. We’ll look more at individual selections in a later post.
Alternative investing, meant to include anything not traded on the traditional finance exchanges, are enticing to small investors because of the potential for more control and greater upside. This typically comes in exchange for more volatility and/or less liquidity. Essentially, there’s a cost for investing in public markets due to the ease of access and liquidity and alternative investments should seek the investments that may be a little harder to reach and get greater returns.
With that in mind, here’s a few ideas on alternative investment options:
We’ve already invested in some of these and we’ll look at some of these options in more detail with new posts over the coming weeks and months.