Macro Tsimmis

intelligently hedged investment

Our tactics for the ISOP (speculative portfolio)

Posted by intelledgement on Sun, 31 Dec 06

The Intelledgement Speculative Opportunity Portfolio (ISOP) starts at $10,000, which is one-tenth the size of our investment model portfolio (Intelledgement Macro Strategy Invesment Portfolio or “IMSIP”). Although we are putting only one-tenth as much money into this one, we anticipate the components of the speculative portfolio will be significantly more risky and higher maintenance than those of the IMSIP; consequently, we anticipate a lot of turnover here.

Why do we plan to spend time on a portfolio only one-tenth the size of our main model portfolio…one we are warning folks not to invest any serious amount of money in? Two reasons: [a] it will be fun and [b] it will provide us with valuable intelligence.

The ISOP is not an investment portfolio; it is a speculative portfolio. What’s the difference? Essentially, the risk is greater, as are the potential rewards. Branch Rickey, the general manager of the Brooklyn Dodgers in their most successful years, famously stated that “Luck is the residue of design.” Clearly it is our intention in placing speculative bets here to position ourselves to benefit from—or take advantage of—good luck. With our investment portfolio, our intention is reduce risk and position ourselves to benefit from what the market is going to do anyway. In effect, with the investment portfolio we are emulating a conservative hitting approach in baseball, whereby the batter is just trying to “go with the pitch” and “put the bat on the ball,” content to settle for a sharply hit ball anywhere, which is likely to result in a single—modest success. With this portfolio, we are “swinging for the fences” and trying to hit a homerun. When we connect, at least one and maybe more runs will score for sure—dramatic success—but the odds of striking out—total failure—are much higher.

However, we believe that in order to make optimal investment (strategic) decisions, we need to be aware of what is happening on a tactical level in the trenches. What we learn while tracking some key speculative positions will increase the chances that our strategic decisions will be good ones. Even if we get badly burned on some of these speculative adventures, with the downside limited (because we are not investing much in any one idea), we expect the value of the information we learn will outweigh any loss.

And speaking of warning folks not to invest any serious amount of money here…it would not be prudent to invest any sum of money that you can’t afford to lose in any speculative portfolio component. Even the biggest and best run companies are vulnerable to Bhopal-scale disasters, automobile-scale technological advances that roil existing markets, and dollar-decline-scale macro trends. Most of our spec plays here are likely to be smaller companies who also have to worry about losing key personnel, Microsoft (or equivalent) entering their market, or two guys in a garage dreaming up a product that will knock them off…in addition to all the bigger-scale risks. This is why for investment—as opposed to speculation—we recommend ETFs, wherein diversification reduces risk.

And if, after all that, you do stubbornly pursue any of these ISOP recs, then you need to pay attention to what is going on there to optimize your ROI.

For our part, the same ROI accounting rules apply here as to the IMSIP: any transaction announced here when the market is open will be settled at the closing price. For announcements made when the market is closed, the next opening price will be used to settle the transaction. Exception: announcements made less than one hour prior to the close of the market are considered to have been made after the close. Initial positions will generally be limited to 10% of the ISOP and may include stocks, options, bonds, and other securities. We may also sell equities short if it seems like a good idea at the time.


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