Black Swam Funds Are Not Going to Make You Rich

Why do you lose money on the investment?

When we listen to experts talk about economics, we often think that all economic outcomes can be totally predictable and always based on microeconomic and macroeconomic events.

This impression is false.

The truth is that investment is much more complex and, at the same time, simpler than all that.

Why do we say that? Because no matter how much of an expert you are, in 30 years, it will be infinitely better to buy an index fund than to do stock picking. All the time and energy you are going to consume could be spent on other things. Nevertheless, we all feel special when it comes to stock picking, and we think we are much smarter than the average. This relative sense of intelligence makes us go through a common process of experimentation and failure.

This process of experimentation and failure can often make us lose a lot of money. I believe that even if you read this at the beginning, you will think that you, too, can do better than the indexes and try to beat them. In 5, 10, or 15 years you will realize that the money you have lost in commissions is infinitely greater.

Another feature of the markets that is not in the investment books is black swans. These are events that have never happened before, and they happen constantly. Sometimes in a positive way, and many times in a negative way.

These events are not included in the economic models, and therefore, the chances of their occurrence are usually around 0%, hence the low valuation of many products.

What the economic books do not say is that if you get one of these events right, you will most likely never have to worry about money again.

There are countless cases that have done it this way. But on the other hand, we must be very careful with the management of the capital, because if we do not do it correctly, we can lose a lot of money.

The case of Covid-19

In March 2020, Covid-19 led the markets to stress never seen before in a period of just three weeks. This caused all economic theories to be undermined overnight, and such unlikely events made x1,000 in just a few days.

The behavior of investors is something very easy to understand, and in these moments of panic, instead of buying and waiting, they decide to sell with losses and wait.

They become afraid of investing, and from that moment on, they only take refuge in very safe assets such as bonds, cash, and... funds that are aligned with a black swan.

In the case of Covid, two ETFs have emerged that attempt to counteract and benefit from the occurrence of a black swan. As expected, these ETFs raised a lot of money after Covid. This time, personally, is the only time I would no longer buy insurance. Does it make sense to buy fire insurance when your house is completely burned down?

Very quickly, the people who invested in these funds saw their savings continue to lose purchasing power, and the moment they leave is when it happens (again).

There is a problem here, and that is that these funds often do not behave as everyone believes, and we will see if when a black swan happens, they help us.

Today I am going to introduce you to two of the best-known ones:

Cambria Tail Risk ETF (TAIL)

As we can see, the 5-year results are not good at all. Even when Covid happened, its NAV only went from 20 to 25 (a 25% increase). This type of fund loses money in the long term because the management of options is not optimal.

Amplify BlackSwan Growth & Treasury Core ETF (SWAN)

This is a fund that, although its name bears the word "Black Swan", is positioned to be eminently long. It actually lost money during the Covid. In addition, look at when the biggest inflows of money have been...

Conclusion

Very few funds know how to do it correctly. Maybe the only one is Universa, but to enter, you must be an institutional investor and multimillionaire.

Only good risk management will make you a lot of money. We have been doing it for a long time, and even though we are exposed to many black swans with very OTM options, we still have returns well above the indexes (and a large part of our portfolio is invested in very low-risk assets).

Now our portfolio in detail.