An investment framework

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Frosti85
Posts: 63
Joined: Thu May 11, 2017 3:27 am

An investment framework

Post by Frosti85 »

I want to discuss an investment framework here I thought about :)

Here are the axioms of the framework (if you dont agree with those, you probably wont agree with the framework)

1) the future is unpredictable, especially on a macro level (think societies, economies, entire nations)
- we dont have model that can explain the world good enough (on the society level)
- even if we had such a model, it would still be almost impossible to predict the long term future, because of chaos theory (very small changes in the start setting lead to gigantic changes a fear years later)

bad things that could happen in the near future:
- peak oil leading to world war 3
- climate change making big areas of the planet uninhabitable, leading to wars and extreme immigration / emmigration conflicts
- mass islamisation and desctruction of freedom

good things that could happen:
- fusion power / solar solving the energy problems of mankind
- asteroid mining could give us access to 1000x the resources we have now
- artifical intelligence could speed up research exponentially

2) because humans are biased, emotional and suffer from short term-itis, recency bias and so on:
- framework has to protect the investor from himself, rules should be set up in advance when changes will be made, and the framework should not require much active action from the investor (maximum a few times a year)
- decissions must be based on hard facts that are easily measureable (example: inflation is measureable, if you dont change the metric, oil prices are measureable, demographics of populations are measureable)

so because I'm kinda agnostic towards the future, I should bet like 50% on a good future and 50% on a bad future (EV of each bet being the same)

But instead I want to bet 2/3 on a "good" future and hedge against a bad future with 1/3 of my capital.

I still hope and wish that mankind will solve our problems and we will colonize the stars one day, so this 2/3 1/3 alocation will make me feel better.
Hope you understand this logic. If the EV of each bet is close to each other, I will tilt my decission towards the bet that makes me feel better.

The only non-agnostic assumption I make, I think inflation is more likely than deflation. I just have a deep distrust of fiat currency, and I think this is justified from history.

So my asset allocation will be:

2/3 prospertiy assets, 1/3 recession assets
2/3 inflation hedges 1/3 deflation hedges

I also have to say, because of the big social security network we have here in austria, this is also a reason for me to be a little bit more on the aggressive side (government pension is like a very longterm duration bond that you cannot sell)

So my asset allocation will be:

4/9 global stock market (prosperity & inflation hedge)
2/9 fixed income (p2p lending, and some corporate bonds, maybe also some government bonds) (prosperity and deflation hedge)
2/9 gold (physical and offshore account), recession & inflation hedge
1/9 cash (recession & deflation hedge)

also from the 1/3 recession allocation I will invest into making myself more self sustainable, a little bit of prepping and so on, basically total collapse hedges

I also want to setup rules in advance when I will have to rethink this allocation, but I'm not so sure about them, so I would like to discuss them with you guys:

- oil price ricing above a certain value
- interest rates for short term cash rising above 2%
- some big government (USA or EU) accepting bitcoin as a currency (could make more sense than to hold bitcoin instead of cash and gold)
- big companies investing into asteroid mining (could destroy gold prices)
- unemployment hitting a certain level in austria, let's say 15%

I'm not sure which rules would be most useful. it shoudl not be too many rules, and they should be easy to verify and measure.

Also, If some of the thresholds is hit, I will have to delay my decission by at least one month, to avoid making decissions out of fear / gread.

I think this framework can still be improved a lot, so I'm very open to disgussion.

Dragline
Posts: 4436
Joined: Wed Aug 24, 2011 1:50 am

Re: An investment framework

Post by Dragline »

Your theory sounds similar to the ones behind the "Permanent Portfolio". Are you familiar with that concept?

Your item 2) is also similar to Kahneman's observation that "Regression to the mean" is probably the best strategy long term. In practice, this is also known as "rebalancing." But I would just use the values of the investments themselves and not try to use macro data to predict anything, because those metrics are not very good at forecasting values of various investments.

Frosti85
Posts: 63
Joined: Thu May 11, 2017 3:27 am

Re: An investment framework

Post by Frosti85 »

Dragline wrote:
Sat Jun 24, 2017 4:43 pm
Your theory sounds similar to the ones behind the "Permanent Portfolio". Are you familiar with that concept?

Your item 2) is also similar to Kahneman's observation that "Regression to the mean" is probably the best strategy long term. In practice, this is also known as "rebalancing." But I would just use the values of the investments themselves and not try to use macro data to predict anything, because those metrics are not very good at forecasting values of various investments.
yep the strategy is inspired by the permanent portfolio.

what do you mean with "just use the values of the investments" ? just normal rebalancing ? or like considering the global market cap of the investments ?

Dragline
Posts: 4436
Joined: Wed Aug 24, 2011 1:50 am

Re: An investment framework

Post by Dragline »

The rules you have set up re price of oil, rate of inflation, acceptance of bitcoin, etc. don't necessarily have a bearing on the value of the investments you propose to hold. They might sometimes, but you'd be better off making buy/sell decisions based on the values or characteristics of the investments themselves.

Trying to time these things and relate the macro to the micro ends up being a fools errand -- markets are too complex to predict in that manner. Most people, even if they can predict an event will occur "eventually", cannot predict the timing. As the old saying goes: "The market can remain irrational longer than you can remain solvent."

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