Welcome

What is the best investment strategy ever created? 

Everyone dreams of the perfect portfolio – high returns with low risk of loss.  Most believe this strategy either doesn’t exist or is only available through exclusive hedge funds with high fees.  But I’ve created a strategy that is very simple to execute and outperforms most hedge funds. I call this strategy Geometric Balancing.

I’ve created this blog to share the investing philosophy with the world.  The concepts I’m going to discuss will seem strange at first.  They are not common.   Many ideas are at odds with the investing world today. But they are founded in proven mathematical concepts.  And they work.  Really well. 

I’m going to teach you a new way to look at financial markets.  We will investigate the mathematical properties of the markets, evaluating how they really work.  We will investigate long standing theories about the markets and determine their merit.  You will learn far more about probability – and its true application in the markets – than any investment blog should dare tackle.  True understanding will not come easy. But when the concepts finally click, you will understand how to invest with confidence, and believe your life’s goals are achievable.

Investing is really only a means to an end.  A stable retirement. A strong college fund.  A bright future.  That’s what I hope to teach you here: the strategies and philosophies that support your life’s goals.   

I hope you enjoy my blog.  Thanks for reading.

My Investing Philosophy

• The stock market is best viewed as random. 
• Geometric returns are far more important than arithmetic returns. 
• Individual investments likely have a negative geometric return. They will all degrade and die if given enough time.
• The stock market’s randomness is not random.  Volatility clusters and is predictable.
• The stock market is the product of random returns.  Not the sum. 
• Diversification and rebalancing work by shifting a portfolio’s performance from its geometric mean towards its arithmetic mean (see Shannon’s Demon). 
• Rebalance as often as possible.
• Use and understand the Kelly criterion , especially when employing leverage. 
• Most portfolios are over diversified. 
• Drawdown is more important than volatility. 
• “Market based” estimates of volatility can’t anticipate non-market based events (earthquakes, volcanoes, terrorist attacks, etc). 
• Invest with a “factor of safety”.
• Back test strategies over sufficient time periods.
• Monitor the system to verify it continues to work.

The Strategy

• Long only.  No shorting. 
• Invests in 4 items:  the S&P500, the 30 year US Treasury Bond, Gold, and Cash.
• Seeks to maximize the geometric return.
• Rebalances frequently. 
• Applies leverage and cash to the portfolio via the Kelly criterion.
• Uses a “factor of safety” in portfolio construction.
• Does NOT use momentum or trend in any way.

The Back Test

I back tested the strategy through 1978 (I back tested similar strategies through the 60s as well).  The results of the unlevered portfolio are in the previous table.  The results of a levered portfolio are below.  I will explore each of these strategies in detail, as well as others, in the blog.  

*Calculations are my own. Results are theoretical, do not represent returns that any investor actually attained, and are not an indicator of future results. Returns do not reflect trading fees. Dividends are re-invested.