Portfolio Review: The Cat, The Tortoise And Me

For many investors, navigating the complexities of the financial markets can feel like a jungle. Trapped between the allure of high returns and the fear of significant losses, indecision makes it easy to feel paralyzed. This past year, I embarked on an experiment to inject fun and clarity into the investment process by creating thematic portfolios inspired by animal archetypes.

These portfolios weren’t meant to be strictly followed as investment strategies, but rather tools to enhance analysis and provide a more engaging framework for understanding risk tolerance, time horizon, and investment philosophy. By embodying the characteristics of different animals, these portfolios aimed to bring these often abstract concepts to life. This article delves into the year-long performance of these portfolios, analyzing their success in achieving their objectives and offering valuable takeaways for investors of all stripes.

The Three Portfolios:

• The Tortoise Portfolio: Inspired by its namesake’s slow and steady gait, this portfolio embodies the “slow and steady wins the race” philosophy. Prioritizing long-term growth and capital preservation, it focuses on companies with solid fundamentals and a commitment to environmental, social, and governance (ESG) principles. With a lifespan of 150-175 years and secure housing, its objectives are long-term. It has many children, all with safe housing, so there is no urgency or dependency on income.

• The Cat Portfolio: This portfolio channels the feline’s boldness and agility. With the species’ natural ability to have nine lives, it is not afraid of risk. It prefers to manage the portfolio actively, chase momentum, and pounce in and out of position at the right moment. With a life span of 12-18 years, it aims to take as much risk as possible in its early years to secure as much retirement as possible, confident that a frugal retirement is possible if unsuccessful. Targeting higher returns through active management and momentum strategies prioritizes companies with near-term growth potential and catalysts that could propel their stock price upwards.

• My Portfolio: This portfolio represents my investment strategy, which has as its primary objective the exposure to the seven most important trends of the century. Its goal is to accomplish this by incorporating elements from the Tortoise and Cat portfolios. Recognizing that most investors have a blend of risk tolerance and time horizons, this portfolio seeks to balance capital preservation and capturing market opportunities. I also separated my portfolio into Only stocks and the entire portfolio, considering cash and options.

Methodology:

All three portfolios used the Vanguard S&P 500 ETF (VOO) as a benchmark to ensure a fair comparison. Each portfolio used stocks and VOO to manage risk and exposure. Certain stocks utilizing partial allocations were treated with a “wait and see” approach. This meant incorporating position sizing based on pre-defined conditions, such as exceeding a specific earnings target, before investing a full allocation.

In the past articles, I included a perspective for each portfolio, detailing whether each portfolio would include the analyzed stock and in which way.

To build the Cat and Tortoise portfolios, I will assume a proportional position for each stock and the portfolio on the selected date. VOO will fill empty allocations that will be used as the benchmark. Any additional consideration made in the past articles are also incorporated, e.g., “The portfolio will include a half position, and if the earnings guidance is above expectations, it will double down.” in that case, the portfolio would include a 1/14 of the position in that date the article was published and if the conditions are met, increase the position to 1/7.

Although there are more appropriate benchmarks for each portfolio, using the same benchmark for the three portfolios seemed more illustrative, making it easy to compare and contrast.

From the start of the process in October to the end of March, VOO delivered astounding results: 22.4% return, a Sharpe ratio of 2.42, and a maximum drawdown of -3.9%. These figures consider daily returns and a risk-free rate of 2.5%.

The Tortoise Portfolio

The tortoise portfolio made five allocations and maintained a strong position in the benchmark. The only partial allocation it made was Aspen Aerogels (ASPN), which grew as the conditions mentioned in the article were met.

• DexCom (DXCM) – The stock presented a fair price and long-term outlook. Despite the downside risk, an allocation was made because of its long-term view of CGM.
• MercadoLibre (MELI) – It provides exposure to two of the most important trends of the XXI century: the integration of physical and digital realms and technological convergence across sectors. With limited downside and long-term prospects, it was a good fit.
• Aspen Aerogels – The portfolio’s key consideration is its ESG front. Aspen provides the rare combination of an ESG-friendly investment and a correlation to the Oil industry. Paired with the battery initiative, it perfectly matched the portfolio objectives, so a significant portion of the risk budget was allocated to Aspen Aerogels.
• Tyson Foods (TSN) – It was a relatively straightforward match because of its yield and downside protection during an economic downturn.
• Fluor (FLR) – The stock matches the portfolio, given its natural ESG hedge and bet on future yield. This plays well with the portfolio’s long-term objectives and modest yield needs.

The Tortoise portfolio delivered a holding period return of 17.0% and a Sharpe Ratio of 1.23, measuring daily returns and taking the risk-free rate at 2.5%, with a maximum drawdown of -3.9%.

The Cat Portfolio

The tortoise portfolio made six allocations and maintained a comparable position in the benchmark.

Nvidia (NVDA) – A was given for the portfolio’s momentum; in the article, a hint of an option collar was mentioned as protection for the portfolio, as Nvidia seemed somewhat overpriced at the time.

Tyson Foods (TSN) – The stock had enough upside to justify an allocation and offered some protection against deteriorating macro conditions. It is not a priority for the portfolio, but it is a “nice to have” feature.

Aspen Aerogels – The portfolio is fully committed to the stock. The upside was substantial for this risk-seeking portfolio, which makes it a prime candidate.

Netflix (NFLX) – Half position included. While it had significant upside potential, the catalysts are unlikely to suddenly affect the price, which is not in line with the portfolio’s relatively short time horizon. It was fun revisiting the virulent modeling for Netflix.

MercadoLibre – This was a vital inclusion. With a substantial upside and high uncertainty in the macroeconomic scene, which make it less likely for securities to trade at a statistically fair value, MercadoLibre is a good candidate for a 2024 play. After that, it might be on the chopping block.

Applied Optoelectronics (AAOI) – Presented an excellent fit for this portfolio because of its short-term catalysts, despite the added risk they may present. The upside is attractive enough to justify the potential drawdown. A laddered approach to building a position was considered in the article, and the conditions for a full position have not been met yet.

The fear of missing out, and the trends are good fits for this risk-seeking portfolio.

The Tortoise portfolio delivered a holding period return of 36.6% and a Sharpe Ratio of 2.41, measuring daily returns, taking the risk-free rate at 2.5% and a maximum drawdown of -4.31%.

My Portfolio

My portfolio delivered a holding period return of 35.0% and a Sharpe Ratio of 1.78, measuring daily returns and taking the risk-free rate at 2.5% with a maximum drawdown of -10.3%.

The portfolio’s holdings of Uber (UBER), Digital Turbine (APPS), Tilray Brands (TLRY), and Yeti (YETI) remain the same and will be revisited soon.

Nvidia’s (NVDA) position was reduced, taking profits; the portfolio took positions in TLH and SGOV, which are included in this section, although they are based on bonds, as it seemed appropriate based on the article’s discussion. The position on MercadoLibre was increased, and the portfolio took a small position in AAOI.

Crispr Therapeutics (CRSP) is also present in the portfolio, and based on the catalyst described, an increased position might be made. Interestingly enough, the risk profile did not match either the Cat or the Tortoise portfolio, but it did match mine.

The Majority of the options were collars or collar-like strategies in Advanced Micro Devices (AMD).

Options and Cash

I am separating the portfolio into stocks only and including options and cash, as both cash and options significantly change the portfolio’s risk profile.

The cash in my portfolio started at 5% at the beginning of the period and finished at around 9%. This is in line with the expectation of deteriorating economic conditions.

Including options and cash, the portfolio delivered a holding period return of 37.0% and a Sharpe Ratio of 2.2, measuring daily returns and taking the risk-free rate at 2.5%. It also had a Maximum drawdown of -8.7%.

Results analysis

The Tortoise portfolio delivered poor results. Not because it is the only one that did not beat the benchmark in absolute return, but because its most crucial risk metric, the maximum drawdown, is equal to the benchmark, with a lower return. To address this, future inclusion will consider an additional sensitivity to the short-term downside of stocks. It’s a slower start than expected for this portfolio, but slow and steady wins the race.

The Cat Portfolio was quite successful. It beat the absolute return of the benchmark, which was the most critical metric for the portfolio, and it almost matched the benchmark in the Sharpe ratio. The aggressive stance paid off in this period, and the hedges included also helped maintain the risk at a reasonable level. It remains to be seen how this portfolio will fare under different conditions.

As for my portfolio, there is still much work to do to address the issues exposed in the previous article. I feel proud about the effect cash and options had on the portfolio, slightly increasing return and significantly reducing volatility and maximum drawdown. A Sharpe ratio of 2.2 is not bad by any standard, but there is clear room for improvement.

Considering the “extreme makeover” I am set to accomplish this year for the portfolio, some inefficiencies were to be expected. Cash was suboptimally utilized in this rebalancing process. Correcting that and implementing the pending modifications will hopefully improve the shape ratio by more than 10%, which is the current gap vs. the benchmark.

As macro expectations go, the portfolio was set to protect itself from a downturn in the economy. This did not occur in the period, and quite to the contrary, the market boomed. Consequently, some portfolio inefficiencies are also due to this gap in macro expectations; if the price for increased protection from a downturn is a 0.24 sharp ratio, it would be more than acceptable. The maximum drawdown was higher than the benchmark, options were protected well, and my risk profile and time horizon allowed for this kind of drawdown without stress.

Pending Modifications

In addition to the points mentioned above, I am working on more graphical representations of risk and greater details on valuation, which may give color to the risk parameters.

I also plan to include sensitivities on critical metrics in the valuations so that they may be considered in the maximum drawdown and fair value ranges of the companies analyzed.

The main focus of rebalancing is properly allocating risks and exposure to the critical trends of the century. So, let’s review them and see how the portfolio is doing.

The 7 Trends

1. Technological Convergence Across Sectors: The global proliferation of the Internet further accelerates this trend, fostering interconnectedness across previously distinct domains. This allows for additional exposure to the technology sector, spearheaded by AMD and Nvidia positions. (Well covered)

2. Data Dilemma in IT: privacy concerns against the invaluable benefits of data utilization. Time processing complexities loom ahead, requiring adept solutions. Hedging the risk has not been fully accomplished, and stocks in this area will be explored in the future. (Exposure/Hedge needed)

3. Integration of Virtual and Physical Realms: The convergence of virtual and physical spaces will redefine how we perceive work, leisure, travel, and transportation. The stock relies on Meta (META) and CD Projekt Red (OTCPK:OTGLY). Video game exposure is lacking in the portfolio, and additional opportunities will be analyzed in the future. (More exposure needed)

4. Transformative Shifts in Demographics and Healthcare: Anticipated shifts in global population growth, distinct from the trends of the 20th century, will usher in new economic conditions and trends. DexCom and Crisper Therapeutics are the primary sources of exposure here, but the healthcare sector is still undercover. An increase in these stocks or other companies will be explored going forward. (More exposure needed)

5. Sustainability Challenges and Energy Dynamics: Innovations in production materials, waste disposal, and transformation processes are paramount. Additional exposure to water-saving technologies and green energy alternatives will be explored in months to come. (More exposure needed)

6. Transformation in the Infrastructure Industry: The infrastructure sector is on the brink of a significant transformation, witnessing the emergence of novel business models, products, and services. Unclear whether the portfolio is sufficiently exposed. (Under review)

7. Increase in Entropy: Societal disruptions, including pandemics, intensified climate change impacts, and migration, signify a new era characterized by new volatility patterns and correlations. TSN, FLR, SGOV, and TLH positions were designed to protect against these entropy increases.

Conclusions

It has been a wild ride, and macro expectations are shifting rapidly. I hope the animalistic portfolio provides proper context, and perhaps more dummy portfolios will be included.

As we saw in the section above, there is still much to do to cover the seven trends of the century well. Rebalancing these allocations or finding companies that can overlap these trends well will be the key to success in building this long-term portfolio.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.