It’s amazing, for me, that after 25 years looking at this stuff I still manage to get surprised when I should not. I read about people that spend millions to buy a jpeg of a rock (and thousands to buy the meme of that rock) and others that will not touch an S&P500 ETF because it is too risky. Usually the person buying the jpeg not only is rich but use a non trivial part of her wealth to ‘speculate’ while the other example is upper-middle class at best (I am looking at my dentist). So rich are still swinging for the fences while people that should take risk, at least a bit!, do it in the wrongish way, i.e. go all-in on their already bigger asset, their house, rushing to pay down their mortgage.
Time flies and I do not recall how long ago I wrote anything specific about my portfolio. I am not a fan of putting here numbers, a bit because I consider it financial porn, a bit because they will not be representative of the whole context anyway…unless I write the whole context and it is something I am definitely not interested to do. It’s the inverse Instagram syndrome: instead of flexing stuff you bought while hiding that you are in debt, you exhibit your savings but you gloss over the sacrifices you made to get there, or the specific circumstances that let you arrive there.
Interactive Brokers
These are the numbers that I like to discuss though, not the absolute value of my portfolio but its return and risk metrics:
It’s been a year since I started my little project on InteractiveBrokers to build a levered portfolio. Obviously a year is a very short period to draw any meaningful conclusion, I will present some initial considerations. Anything in blue represent my portfolio while the line/bar in green are the closest available benchmark on IB to a 60/40, the AOR ETF from IShares.
Let’s discuss first some differences between what I am doing and AOR:
- my portfolio targets are 60 stocks, 30 bonds, 10 real estate
- I am using some value and factors tilt in the stock portion
- the currency mix between my portfolio and AOR have definitely some differences that can create some noise in the final numbers
- I use a 1.3 leverage while AOR is unlevered
After one year, my absolute return is higher than AOR but lower on a risk-adjusted basis; in short, it means I simply took more risk to generate a higher return, I did not produce any alpha. And this is fine for me, actually it was exactly my initial goal. While I obviously hope that my financial decisions will lead me to beat the market, I see it more as a nice surprise if happens than the goal of my actions. I did not beat the market but, as they say, you cannot eat risk-adjusted returns, so I like where I am.
Max Drawdown, and to a lesser extent Sharpe Ratio, are the two risk measures I care because I run a levered portfolio. I have traded I do not know how many bear markets in my life, by now I know I can stay put and do not sell into a panic. This means the best risk proxy for me would be a permanent loss of capital, not volatility. When you use leverage, you have to keep volatility and crucially max drawdown within a certain threshold otherwise you risk to get a margin call and see you portfolio closed out by your broker. This is not my only portfolio, I can always transfer some liquidity from other investments into IB to cover for a margin call but is worth keep an eye on max drawdown.
While this have been a good year return wise, it was not informative about the robustness of my strategy; in a way, it was the worst possible start. When you are managing risk, the last thing you want is to feel overconfident and cocky. From taking a jump too big with my snowboard ending with a broken nose, to ride a too big wave ending with me spending minutes underwater thinking “uh, so you can really drown doing this shit”, I have seen a few. This year was as smooth as it gets, an almost straight arrow up and right. It will not be the same in the future (:() and I have to be prepared for it. Forget about that Sharpe ratio as well, after a full cycle it should converge to around 0.7, ideally not much lower than that.
My plan is to grow the levered part of the portfolio only up to a specific absolute amount. Once I reach it, I will move further gains into my ISA and keep the IB portfolio stable at that level.
So far I am pretty happy about IB, too bad they do not allow me to buy (MiFiD) the ETFs I would really like to buy…but then the HMRC will tax the shit out of me so I guess it is fine?
In April a friend sent me this link to a substack post on Kaspi, a superapp from Kazakhstan. I read it and thought: I do not trade single names, I do not know this guy, I do not know how to write Kazakhstan so I will not start to buy local companies, there might be currency risk. Then Mario Gabriele wrote an incredible 3 part-piece on FTX and…followed up with a post about Kaspi. Now you understand I cannot really dismiss the name anymore, even if it is a $21 Billion (!!!) company from Kazakhstan. Am I going back to trade single names? I need a plan.
P2P Lending
The Good
My hit ratio on shady/scam platforms is still high: TFGCrowd and Crowdestor are not officially out of business yet but defaults are piling up. The remaining outstanding call is on Bondora but the good news on this is, even if I wiff, I would have ‘lost’ the opportunity to invest at 6.75%, not the biggest return out there.
Twino, FinBee, Viainvest, LinkedFinance, EstateGuru are working as expected, FellowFinance and Iuvo are having a rough patch but still fine overall. I am still adding funds to EvoEstate.
The Bad
Two of the platform I invested in are on ‘life support’, to use a kind definition. Viventor has officially closed to new investor…like I officially decided I am not going to date any Victory Secret model. The residual hope is attached to the fact that the website is still working, some loan originators are still paying and I can withdraw funds. Funny enough I still have an open credit with Aforti Finance on Viventor, whereas Mintos at the same time was able to recover everything from the same lender: looks like they are not even trying to recover funds…
DoFinance published an update few days ago after months of silence. Clearly, they did not spent the time to learn English. I manage to withdraw some funds until May 2021, after that they did not recovered any other sum; the update combined with the fact that they are generating close to 1m of new loans every month give a bit of hope for the future.
As for any bond-like investment, p2p returns depend more on the investor ability to dodge defaults than the yield on each long position. This is the reason why I put emphasis on identifying legit, sustainable platforms and to get a yield that compensate for the risk taken. With traditional and even high yield bonds offering low returns, p2p lending can provide a much needed ‘bump’ to the 40 side of your 60/40 portfolio. You need to put the work and research, the good news is that when it works, the sail ahead is quite smooth; at 10% yield, you need around 7 years to double your investment: after that, you can withdraw your initial transfer and just play with house money.
Crypto
Someone earlier this week asked Packy if he was going to write again about something that is not crypto; I definitely got the fever from him. I started to build a position in AXS, the Axie Infinity game token; this despite Matt Levine providing a quite compelling bear case on it:
You can find the bull case in Packy’s substack, there is really no point for me to try and repeat in a less nice way his thesis. I liked Packy’s post on Solana as well, also because this time he provided the bull AND the bear case. As my biggest position right now is ETH, diversifying in a competitor make sense. Obviously between the moment he wrote his piece and now, the token price exploded:
Josh Brown wrote a great piece on why Bitcoin should and would go to 100k. While I am not particularly interested in Bitcoin itself, I am trying to find a way to use it to build some cash and carry positions, i.e. some risk-free arbitrages that can yield around 10%/year. It is a bit tricky to reach the risk-free status in such a trade if you do not have an algo behind to check the market 24/7 but at this stage I am not planning to use big amounts: I will manage risk via position sizing and not stop losses. In a recent post I linked the Pirate of Finance video where the basics of the trade are explained. You can also check old posts on why I am not interested in Bitcoin.
I understand all of this can feel a lot like the 2000 and the dot.com bubble…but on the other side it’s been how many years we are hearing this? Greenspan infamous ‘Irrational Exuberance’ speech happened in 1996, the bubble popped four years later. Some people started to call a bubble in stocks in… 2014? and we are still counting. A lot of this stuff will go to zero (do you remember NBATopShots?), some will experience violent corrections but might prove to be useful and stay.
This week one of the prominent Magic streamer and game legend was asking himself if going to a tournament with cards that are worth thousands of dollars was worth the risk of being robbed. My parents were shocked 25 years ago when I was buying ‘a piece of cardboard’ for 20 euros. If people arrive to steal from other people, it means not only that these things have value but that the same value is sufficiently shared to sustain a liquid secondary market for stolen things, no matter what the larger part of society thinks. Not every NFT will be embraced by a community lasting decades, not every blockchain project will have useful applications built on…but some will, no matter mine or your understanding and tastes. At the end of the day, there are ‘artists’ making a living with reggaeton…
Disclaimer
P2p lending represent less than 5% of my portfolio and crypto less than 1%. I think is import to contextualise this given the amount of space and visibility both investments have on this blog. This year I bought a painting as a gift for my wife that costed more than all my crypto portfolio (I wrote this just because I am facing the painting right now). I am not a degenerate gambler and you should not be either ;). If crypto will grow in % terms would be because the stuff I bought increased substantially in value (or the stock market crashed and never recovered): I am adding to the portfolio but it is the proverbial drop in the bucket.
The COVID Trade
I read a lot of articles and opinions on how COVID will change our habits. Millennials are leaving big cities like London to live in bigger spaces in the countryside; lots of them are doing it because they could not afford anything in the city and now the commuting is a smaller problem. As it happens in many cases, the right trade (in my opinion!) is the contrarian one. Prices in London were inflated by the ‘money launders’, Chinese, Arabs, Russians that bought apartments as a store of value only to leave them empty and the ‘Airbnb entrepreneurs’, property investors that could extract higher rents from short term tourists than people actually living and working in town. The latter got a huge hit from the pandemic, when you have a mortgage to pay and no one to rend, you end up accepting even creative solutions like this one. The former might re-think how bullet-proof their RE investment is; plus, given the current travel restrictions, might be harder for them to come and close transactions, if they do not have a trusted local agent to act on their behalf.
The fundamental reason why prices were high is because living in London offers a lot of perks, especially if you are young and willing to party extend your social network. This weekend there was a big festival in a park close to my place and it was PACKED; not a real surprise, considering that some popular spots here were busy even at the peak of the first lockdown. A month after ‘Freedom Day’, life seems to be back where it was two years ago…if you consider leisure spots, because my office is still emptier than ManCity Champions League trophy room. Food delivery is great when you are too tired to cook but will never replace a good night out at a restaurant: food quality is poor(er) and the service cost will only go up; Live sport is a completely different experience compared to a game watched on your couch; same logic applies to theatres, clubs, exhibitions and so on. As much as the Metaverse is on the rise, we will always be social animals. (you can perfect your Tinder game as much as you want, but if your matches are scattered in a 100km radious and have no incentive to meet you mid-way, better you buy a very comfortable car and a great dose of patience)
Until maybe the advent of autonomous cars, the closer you are to the places you want to hang out, the happier you are. Unless a bunch of young tech bros will decide to build in Rye the UK equivalent of Austin (including an airport and pleasant climate) London status will not be challenged. Yes, maybe instead of having Drake doing 7 consecutive dates at the O2, he will visit 7 different boroughs in 7 smaller venues across London, but he will still pay a visit. Not so sure he will come to Peterborough. Commuting for leisure is more palatable than commuting for work…but it is still commuting. I could walk to the festival and the next day walk to my office, this is the game-changer.
Unfortunately London prices did not crater, they simply stayed put when prices around shoot up. Your dream apartment might still be out of range for your budget. But if there is a moment when you should try to make your move, that moment is now. When people will be free to travel as before, when they realise that the farther they live from the office, the farther is that promotion they want to achieve, when Brits recognise the Brexit mistake and undo it step by step (?!?), your window of opportunity will be closed.
What I am reading now:
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