How to Make Your Asymmetric Portfolio More Antifragile
+10% CAGR
The main quality of our portfolio is that it can benefit from any market situation, or at least not get hurt too much. For example, in 2021, the S&P 500 had a return of 27%. Our asymmetric portfolio had a return of 33%. We know that the return may be very similar and not surprising and that it may be better to have 100% in the SPY.
However, the interesting thing comes in negative years, like this year (2022). This year the S&P 500 YTD is -18%. Our portfolio is very close to 0%.
One of Warren Buffet's main teachings is never to lose money, which is what we do. We adopt this rule to our language, and it would be: "Always stay in the game".
Every investor who wants to be in the long term must be aware that throughout his life, he will experience more than 50% falls if he is invested only in the indexes. I don't need to remind you, but a 50% drop is overcome by a 100% rise.
Our mission is very simple: to outperform the indexes in up years and beat the indexes (by a lot) in down years. We will outperform the indices the more the indices fall. Why is that? Because we have an antifragile and asymmetric portfolio, we have most of the portfolio in OTM CALLs and PUTs.
These very OTM options can benefit from stock market crashes throughout the economic cycles.
Moreover, if we look at history, it seems that the worst is yet to come...
These debt cycles are caused by the money that the central banks put in after the pandemic and are now trying to remedy it through radical rate hikes and QT. To understand the economic cycle, you often don't have to spend $150k on an MBA. By reading four newsletters periodically, you can get a far superior understanding.
On the other hand, looking at where we are in 2022 versus the rest of the recessions, it seems like the worst is yet to come.
Although it seems that we are already far from the 1929 crisis, where markets plummeted sharply in a very short time, we are not so far from 2008, where a 55% drop was reached. This would mean almost an additional 40% drop from where we are.
A risk that very few are counting on
During 1929 and 2008, many brokers and banks closed. In the case of stocks, ETFs, or ETCs, it should not be a problem, as long as they are nominative. However, in the case of options, this is not the case. Since options are purchase or sale agreements in the future, if the counterparty or intermediary does not exist (or has gone bankrupt), there is a good chance that you will not be paid.
On the other hand, in case the cash is excessive, usually >$50k, you would not be paid back by the broker/bank either.
How to make an asymmetric portfolio more antifragile
This is a risk that we cannot overlook and even more so when we have a large part of our portfolio in very low-risk assets or cash.