Brainstorm: Let's take a step back

Zoom out a little

Hey everyone,

A lot of the articles I have written over the past 2 weeks have been kind of in the weeds. I want to take this one and zoom out a little.

I am going to go over:

• Big ideas for the market and current regime

• Synthesis of information

• Beliefs and free thoughts

Big Ideas and Market Regime:

It's incredibly easy for people to forget that we are in an inflationary bear market. Core inflation appears to be in the process of peaking, but monetary policy remains tight given the level of the FED Funds rate and the quantitative tightening taking place (the selling of FED balance sheet assets).

The nature of the bear market is incredibly important because the FED's tightening has caused the valuation of assets to contract, as opposed to a deterioration in the underlying cash flows. This is key because many people believe that if the stock market is crashing, the economy must be doing poorly. That's not necessarily the case at all!

Market Regimes and Allocations:

Whether you have a 401k, a personal account, or run a hedge fund, you always need to know the market regime you are in because it determines how you adjust your decisions incrementally.

For example, in a situation with longer-term allocations, there needs to be an intentional way of managing beta. What I see quite often is people trying to use short-term information or tools to make their longer-term decisions. This is why you need to have specific strategies and tools that align with your time horizon.

I will always bring you back to the first article I wrote on wealth management:

The starting point is understanding how to construct a portfolio and make decisions under uncertainty; then, AFTER you have a good foundation, you can add trades that generate alpha.

Quite often people start with a bunch of one-off trades instead of constructing a portfolio and overlaying alpha onto it. In a previous article, I mentioned that I might consider running a real portfolio where you can see the process of managing beta through a cycle and then also witness the additional alpha. We shall see :)

I haven't spoken much about managing beta because my main focus is generating discretionary alpha. The problem is the main thing that the average investor needs is beta management. This has never been clearer than when the 60/40 approach got crushed last year.

Here is the risk parity ETF. Since the regime is an inflationary bear market (remember, the regime matters!), both the stocks (60) and bonds (40) portions of portfolios underperformed.

Where do you go?

The ultimate question is where do I put my money in this environment? NONE OF THIS IS INVESTMENT ADVICE****

I think about this in two ways:

• First, since we are in an inflationary bear market with the Fed tightening, I want to hold a lot of cash. Why? Because, for the first time in a long time, I get paid to hold cash. The 2-year yield is 3.8% right now.

• Second, active management is essential in a regime with heightened volatility and structural shifts. It's going to be very difficult for passive products to provide returns over the risk-free rate in this environment. This means the only other option is active management.

Something I've been hearing a lot recently is, “Hey man, year-to-date stocks and bonds are up. I'm still down from the 2022 high, but it’s not as bad as it was last year. Things will return to normal.” To be completely blunt, this is delusional! There are just so many signals screaming that the current world is drastically different from the last 40 years.

The era where bonds only go up is over. This doesn’t mean we won’t have rallies in bonds. It means the returns on bonds will not be comparable to the last 40 years. There will be a lot more volatility in the returns.

Bonds impact everything because they have to do with the price of US dollars, and all domestic assets are priced in US dollars! Furthermore, the dollar is the world reserve currency. Therefore, this environment isn’t just about the US; it’s about the world changing.

None of this is meant to be overly dramatic. It’s simply drawing attention to the risks in the system. The way you navigate these will determine everything for the next decade, in my opinion.

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Synthesis of Information

After recognizing the market regime you're in and the existing problems, you need to implement a process for gathering and synthesizing information for your strategy. We know there are risks in the financial system and in macro, but determining the right action is incredibly challenging, especially if you're just beginning your educational journey in this realm.

It's one thing to take educated and calculated risks. It's another to learn on the fly while you're taking these risks. This is part of the purpose behind this Substack. I'm providing a transparent view of BOTH my research and risk-taking.

Fundamentally, you want an iterative feedback loop between your research and risk-taking. This means constantly conducting research to take more educated risks AND using the informational feedback mechanism of your P&L to inform further research.

If you go into the “About” section of this Substack, you can see the structure of the publications. They are designed to mirror the research and money management process.

Main Idea:

The main thing I want you to take away from this section is that THE ONLY way to navigate the regime I covered above is by having an excellent process for gathering, interpreting, and synthesizing information. This is the foundation for exceptional execution.

You could be the most intelligent individual with a high IQ, but without direction and channeling of this potential, it's wasted energy.

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Belief and Free Thoughts:

Shifting topics a little…….

Something I've spent a lot of time pondering is the introduction to the Almanack of Naval Ravikant. You can read it for free here: https://www.navalmanack.com/

The topic of building wealth is very interesting to me. Some people use their wealth as a virtue signal, while others do the same with their lack of wealth. Part of the quote that I share repeatedly is based on the ideas Naval has shared. That's why I have the quote in my Twitter bio.

In my experience, wealth creation is a beautiful thing because it requires a specific mindset. However, at the same time, wealth is transitory. We don’t take our wealth to the grave with us.

I know many people talk about money or wealth as some evil force in the world. In truth, money and wealth are exceptional instruments for revealing what people truly believe in. Money can lay bare the true intentions of individuals. When you're given the freedom to make any decision you want, you begin to see the real person you are.

A friend of mine, who is a financial advisor, always tells me, “Show me a person’s finances, and I can tell you what type of person they are.”

How do I think about wealth and money?

The way I view money and wealth is based on a single verse from the Bible:

“Everyone to whom much was given, of him much will be required, and from him to whom they entrusted much, they will demand the more.” - Luke 12:48

I believe money, wealth, energy, and time are things that are meant to be stewarded well, not spent frivolously. When you steward something, there is a direction and purpose behind the action.

I return to this idea repeatedly because it's so easy for the transitory flashes on the screen, people’s photos on Twitter, and others' definitions of success to cloud what is true. Part of life is simply remembering what is true and internalizing it to a greater degree.

When you view wealth and your time as something to be stewarded, you realize life is a test to see what you are truly made of. I will always operate and communicate in confluence with these beliefs, even if that means I lose money.

Beliefs and convictions are to be held regardless of the cost. Sometimes, holding to what is true will cost you everything, but in the end, it will always be worth it.

Thanks for reading!

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