Portfolio Management: Velocity of Money & Asymmetry

My thoughts on portfolio management - part one discussing velocity of money and asymmetry.

Portfolio Management: Velocity of Money & Asymmetry. 

This is a very subjective topic based on so many variables that it's easy to get lost in. What does this actually mean? How do you position a book (HFM speak) to capture returns?

In my experience, most DIY investors seem portfolio management at a very surface level understanding. Simply dive into "The Market" with momentum names and ETFs works and has worked as a method for long-term positioning and for non-professional investors/money managers. 

It's certainly one way to go if one is after a "long-term" plan but here's more to it. 

It worked for a friend of mine who sold a company a few years ago for near $40MM and still makes high 6 figures. His JPM advisors have him in a portfolio that is designed to be 20-years out, despite the recent $2MM drawdowns during this little bear market. 

But again, the short-term does not matter - according to that particular lens to which one views portfolio management.

So this is a very subjective topic based on the individual but here is what I believe in as it relates to money and portfolio management. 

I am naturally skeptical of the markets at large, there is always some CEO/company trying to pull a fast one in my experiences. Then economic cycles change, political leadership change, which change policies so alpha is constantly migrating around to different sectors. For me, that makes it hard to look past a 3-5 year outlook, which, I am alright with.

So if I am taking a few ideas that I believe are longer-duration investments it starts with that time horizon: is there a significant move in the next 3 to 5 years? 

If yes, then you have my attention. 

I'm going to start this off with two screens that I use when looking at what and how much of that what goes into a portfolio. In part two of all of this I'll expand on other factors but starting here is ideal.

Velocity of Money. 

When I look at the markets at large I am asset-class agnostic. Sure, I prefer to stick with institutionally held names, select ETFs and at times, build my own ETFs in a sector with small or mid cap companies as a way to invest in that sector. But it doesn't really matter what it is to me as long as the one variable of: how long is my capital being put to work? What is the velocity of the RoR? Is it 5 years? Is it 9 months? 

What sectors are inflecting? What company might be going under some corporate change that might allow value of the stock price to adjust (higher or lower) faster v. a company that is just lightly trending higher? 

That matters to me within the portfolio.

Look, conventional stock scans will give you lots of stocks that might be cheap based on last year's earnings. Just because a company is trading 4/5 times earnings does not mean it's cheap. But let's say you're right. Will you double/triple up? And if so in how long? At which point does the market at large realize your thesis that fair value is higher?

The same goes for the chartists out there - which make no mistake, I use, but as a secondary filter for market-timing, entry/exits etc. You can scan as many charts as you want, and this is a popular screening method for many, but when is the move? How long will it take? Now, I am sure you're tired of hearing this but I believe in price/market timing and there was no way I could have shorted Carvana effectively (See: Carvana The Masterclass Scheme) without understanding WHEN to do it.

But it all comes back to velocity of my capital in the portfolio. 

I think people tend to get too caught up in looking at potential growth and a few key metrics and lose sight of the capital that goes to work. Yea, some companies like Amazon are success stories but most are not. Most either go bankrupt, have massive cash burn (which is usually said to go to 'growth') but many times used to compensate C-level executive pay packages and perks, or they just get acquired. 

Companies with fundamental tail-winds or with some event-driven catalyst, in my experience, tend to have a faster realization of fair-market value, and that can be long or short, as long as the velocity of that price change is "dramatic".

Think of it this way. If your money is getting invested and you're not A) Getting a healthy dividend from it or B) Having that asset appreciate then you're sitting on dead capital in hopes that, eventually, it will appreciate. 

Would you lend someone money for say, their small business and not some type of interest on that money? Would you lend a company money and wait 10 years to see a return? 

Sure, maybe, in some situations a small allocation (like Venture Capitalists do) into a company might become a 20/30 bagger but most don't. 

That's the same with most companies/situations in the market as I see it so increasing the velocity of the capital is an ideal portfolio tool for structuring what and how much goes into the book. 

Asymmetry 

When you invest in companies, or even situations, what is the asymmetry provided on that investment? Remember, equities are all risk and I want to be paid properly for taking on that risk for myself and clients.

Contrary to popular belief, how you make those dollars/returns matter. Often times you see folks in comment threads on articles about hedge fund managers saying "I could have easily beat them" or "They only returned +15% last year" without understanding the complexities of money management and portfolio structuring. 

I also don't think many understand the idea that not all hedge-funds or portfolios are market long only funds, that some are only event-driven, or credit, or energy...really, the list goes on. 

But at the core of any of any portfolio, there needs to be asymmetry. 

Taking on that risk in an equity, for me, needs to provide some asymmetric element - and I don't mean through the use of the underlying options. I mean some type of catalyst or tailwind. For example, in 2020 crude oil went negative which was just absolutely insane to witness. 

But that situation, at the time, presented an asymmetric opportunity. Buying a basket of oil & gas names provide a margin of safety where if you were wrong, it was small, but if right, right in such a way that it provided a windfall. I like situations, sectors and companies that have some of that in it.

Let's think about it from a very basic perspective. Let's assume you want to buy Apple stock because of their balance sheet, products and well, because they're Apple. Does it make sense just to buy it wherever? I don't think so - at a basic level, buying it at an opportunistic pullback on a daily or weekly time frame is generally better v. buying a vertical chart without a pullback. 

This is not a victory lap by any means, but more of proof of this concept. In May 2022 I posted this: Tesla: No more upside? - it lost the asymmetric edge that it had, at least temporarily. 

So again, if my capital is going to be risked, then let me filter those ideas so that, Ideally, I find more asymmetry on that capital v. just buying a company at random. 

Part of this thinking was inspired when I was a sophomore in college when I read Margin of Safety - thankfully I was able to get my hands on a physical copy. This thought process has evolved over the years with understanding situations/markets more in depth and I am sure it will evolve further but asymmetry is an ideal filter for adding positions into a portfolio.

Concluding 

This is part one of this entry into the blog on Portfolio Management. It might take a little more time to screen investments for the portfolio but if you're someone who doesn't mind the work it's usually worth it. I believe in the idea of being able to understand the financial landscape/companies up to 5 years out as mentioned but even more so, I believe in finding velocity of returns and asymmetry. 

In the second part I'll discuss some other beliefs as it relates to managing a portfolio using concepts that allow for longer-term positions while generating returns in the short-term as well. 

This article is presented for informational purposes only, is an opinion, and is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investments. Any such solicitation of an offer to purchase interest will be made by a definitive private placement memorandum or other offering documents.

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