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ELL Blog

New Investment Portfolio Strategies

When people talk about portfolio weighting, there’s usually only three that people are taught: market capitalization, price, equal.

But what is ideal? We know price is not ideal because it’s based on the share price which is determined by the shares outstanding. With market price and equal weight, it’s a bit harder. Usually equal weight is better, but clearly, the top stocks (tech) of the S&P500 has made the market weighted index outperform the equal weighted index. Therefore, we need an equal weighted portfolio where the weight of the heavy weights are bigger than if they were in the SP500 market-weighted index. We need a way to trim the world stock market into just a few stocks.

Mid-Cap Priority Burrito

  • Pick 20-25 stocks across industries to reduce risk to systemic levels
  • Since mid-cap outperforms large cap and small-cap is high risk, make sure that the basket is something like 80% mid-caps, 10% large-caps, 10% small cap ETF (invest in all small caps or pick no more than 2-3 that are definitely undervalued)
  • Definitions
Type Market Caps Allocation
Small >= $100M; < $2B 2-3 (~10%) or ETF
Mid >= $2B; < $10B 10
Mid/Large >= $10B; < $20B 5
Large >= $20B; < $100B 10
Mega >= $100B 2-3 (~10%)

This is a rough estimate on the allocations, however, I think my own portfolio is a bit different.

Mature-Growth, Mature, Growth, Value Burrito

Another way to maximize returns is to focus on Mature-Growth and Value stocks and speculating on growth stocks. A growth stock is a company that is losing money but is growing at 10%+ yoy in revenues. A Mature-Growth is similar but is profitable (i.e. profit grows). A Mature company does not grow profits; usually pays dividends. A Value is company is any one of these (not growth), which in fundamentally undervalued in the most likely scenario of “business as usual.” What I mean is that write down the assumptions of the market that the stock price reflects, ask yourself if those assumptions are wrong in a favourable manner, and if so, that is a value stock. An example is PayPal. PayPal is priced to die in 20 years. PayPal has been alive for 20 years during which time even crypto did not replace PayPal. PayPal is not just a payment provider but also a processor (Stripe is just a processor). Therefore, PayPal has value beyond 20 years of being a payment method.

Inverse Market Weighted

  • Weights are (1 - market-cap weight)
  • Strategy: smaller mid-cap stocks have more growth potential (and thus higher returns when in a basket) than larger companies
  • Do not rebalance until new stocks are added, and even then rebalance from largest-cap and overweight to the new stock. Never profit take since the strategy relies on betting on the small ones which will keep winning until they are big enough to take profit

Beta Cherry Picking

  • Strategy A: pick stocks based on positive-driven Beta for stocks that are recessionary proof
  • Strategy B: pick stocks based on Beta’s with time horizons that are more in line with investment time horizons (include recency bias if doing en-masse). Then, you take advantage of stocks that report higher Beta’s than what you calculated.