Risk & Portfolio
Covered Call Strategies
Covered call strategies (selling calls against owned stocks) make sense only when call compensation is adequate and investors aren't forced to maintain overvalued stock positions long-term. Used correctly, options provide terrific hedging and conviction amplification.
Irreplaceable Capital
We often manage most of our clients' money. Many times, it's all their investments. So we treat it as irreplaceable capital. When you're 60 and nearing the end of your working years, you can't really recover from big mistakes.
Portfolio Hedge
We put in a small hedge (in accounts where we had option authorization) by buying puts on the S&P 500.
Diversification (Noah’s Ark critique)
The story of Noah's Ark comes to mind: gather two of every kind to survive the flood. This is how Wall Street and academia approach diversification; but as Warren Buffett put it, that's how you create a zoo. We are not in the zoo business,…
Risk (as Permanent Loss of Capital)
Volatility is not risk. Risk to us is permanent loss of capital.
Semi-Permanent Loss of Capital
This is where risk becomes volatility, because in the case of downside volatility there may be a semi-permanent loss of capital — losses or near-zero returns for a decade or two.
Idiosyncratic Risk
The goal is to reduce the idiosyncratic risk that comes from today's transforming global political environment and fast technological change.
Position Sizing
Think of it as a matrix. You have quality and valuation. Let's say you have a very cheap, high-quality company — that's a 5 to 7% position. Then you have low-quality and expensive, which would be on the opposite corner. It's a spectrum.
Mechanical Position-Sizing Framework
We have this mechanical, quantitative position-sizing framework to protect me from myself. When you find a company, you can fall in love with it and get emotional, thinking it should be a 50% position. But it's not, because things can always go wrong.
Diversification
Diversification is the only free lunch an investor will ever get, as risk reduction doesn't need to lead to subsequent reduction in return.
