A lot of this portfolio theory can be answered by ‘how big a rainy day fund do you need?’

Part of the problem is that B-strategy investments are not always available. What would you have invested in around 2006-2007? Gold? Shorts of housing or stocks? It is safer to keep liquidity and then pour into the B-types when they come along. Keeping a constant % of the portfolio (vs. time) liquid doesn’t seem to make sense.

this is what Taleb had proposed in his black swan book..this was even corroborated by a Profsssor of Boston University I happened to meet and listen to his presentation at the FPA conference at Boston last year..He in fact had been personally investing using this hybrid portfolio model..

cheers
partha;

this is what Taleb had proposed in his black swan book..this was even corroborated by a Professor of Boston University I happened to meet and listen to his presentation at the FPA conference at Boston last year..He in fact had been personally investing using this hybrid portfolio model..

cheers
partha

Thanks so much for your post.

With respect to your comment, “Pity though that you have given up on stocks. Forget stock investing in the classic sense and look at stocks as a trading vehicle for making money“…please note that we are in agreement…stocks can have a role in Portfolio B.

Public equities have a distinct place in portfolio B if they can be allocated to in within a quantitative model that maintains and insures a postively-skewed risk/reward ratio (where, I might add, there is no discretionary overlay)

The powerpoint deck on Hybrid Portfolio Theory contains the following definition of investments that are characterized by their potential for a positive asymmetric outcome…

PAO is a positively-skewed risk/reward ratio that can be achieved via investments such as venture capital, private equity, direct (angel) private investment in start-ups and emerging small businesses (PVI), private manufacturing businesses, private real estate, private debt, franchises, operating cash-flow businesses, as well as, publicly traded emerging growth companies, leveraged (long vol) option strategies, and highly specialized investment strategies employed by managed futures and some hedge funds.

A properly executed strategy like that you are referring to can certainly be a candidate for the B portfolio.

Thanks again for your comments.

Your basic ideas and the concept of being a large part in low yielding cash makes perfect sense not only as an asset class but as a volatility dampening agent, if you were. So-called professionals just have no clue what to do to manage risk, other than “diversification” which is the two edged sword of limiting returns, and does not control much of anything in market swoons.

Pity though that you have given up on stocks. Forget stock investing in the classic sense and look at stocks as a trading vehicle for making money. To use stocks in your part B – exactly what we do, has a great advantage over the other asset classes you propose – one always knows exactly what those assets are priced at, and of course ease of entry and exit at a cheap cost. The way we do it revolves around stock picking and of course timing, i.e. short term position trading and a limited portfolio of 4-8 positions, never more than 12.

However, the reality is that great returns are all about risk control. Below explains my major points of view on risk-

“I am a very risk adverse chart pattern break out trader with a system that clearly defines the risk in a trade before it is made (entry-minus exit prices.) Knowing the risk per share allows me to calculate how many shares to buy such that the total risk of the trade to total equity equals whatever percent I want to control. Currently, and for the past year, that risk is ca.0.2% of total equity at risk per trade.

I also control total portfolio risk to total equity by limiting the total number of trades I place in a day and the total number of trades I keep open. That controls the total dollar risk to whatever percent of total equity I deem appropriate at any given time, based on market conditions. Cash is a great dampener of volatility.

The third way I control risk is through a working hedge. When I take a long position I do not hedge it, nor do I hedge the entire portfolio. However, at times, when my exposure to market risk is high and the markets turn suddenly, as they often to do, to dampen risk of loss, as well as protect profits, I will place an estimated beta neutral hedge using -2x short index ETFs. The ramifications of that strategy, how it works and when it works and fails is a long discussion. The net is that it added 17% of the profits in 2009.

And it goes without saying staying away from any risk one can mitigate – e.g., no positions on when earnings are announced, no biotech which is always subject to huge loses from unfavorable FDA rulings, etc.

My belief is that managing risk is THE ABSOLUTE most important part of ANY type of program. The bottom line is that our program accounts did NOT lose money in 2008 and were at all time new highs for June 2009.

Russell Mascieri

General & Managing Partner
RTT Growth Partners, L.P.
(contact via LinkedIN)