How To Think About Markets, Trading, and Wealth Management

Framework

This is the first publication so I am going to lay out a number of ideas in order to frame the research, thoughts, and trade ideas I am going to write.

When we approach wealth management and markets, it’s important to have foundational principles and a framework to conceptualize the information and decisions we make. If you don’t have a clear understanding for thinking about wealth management and markets then even the best information or trade ideas won’t provide benefit to you.

Wealth Management

When we think about wealth management, we want to understand what the goal is. Fundamentally, those who own assets or manage assets are trying to manage them with the goal of meeting some type of liability in the future. The specific types of assets and liabilities an individual has are unique.

These future liabilities connect with the goals that an individual has. This could be passing generational wealth onto children, having enough money for retirement, buying a house, or simply meeting an unexpected expense. This is why a specific strategy must be developed in order to take into account all known variables and goals for an individual.

This strategy needs to connect to both growing and/or preserving the wealth of an individual through ALL economic and market environments. A portfolio is simply the sum of decisions that are supposed to have durability through all periods of time. This means that you need to first understand the different market environments that can occur and how those environments, as well as shocks in those environments, impact the assets of a portfolio on both a nominal and real basis.

There is a lot that could be said on this topic but a good resource I point people to for understanding these dynamics is the ReSolve Masterclass: https://investresolve.com/series/masterclass/

ReSolve does a great job at laying out how to think about wealth management and portfolio durability through all market environments. After you have a foundation of preparation and know how to manage your portfolio through various market regimes in a way that doesn’t just survive but benefits, then you can take additional bets to generate excess returns. Most of the time people get this order wrong.

Thinking like a business:

Within the framework of wealth management, there needs to be a correct quantification of the market environment we are in, how to manage a portfolio in that environment and how to take additional bets that are justified.

My specific skillset is as follows: I think about what I do under three major ideas

• Innovate: I am in a constant process of researching the ever-changing structure and flows in the economy/market to identify durable ways to make money.

• Systematize: I then systematize these ideas so that there is a testable framework for confirming or disconfirming the validity of an idea. Ideally, this system then functions as a continual source of insights that requires minimal maintenance.

• Run: I then run the system/strategy or use it in order to generate returns in the market.

This entire process of innovating, systematizing, and running is very iterative. As you run a system, you usually identify additional problems or needs that require you to go back to the innovating process to find a solution.

There is a great section of a book called Advances In Financial Machine Learning that describes this process:

The goal is to think like a business where you run a research laboratory. Thinking like this is incredibly important because survival in financial markets is dependent on being able to adapt and survive changes in market regimes. This is how I think.

Why does this matter now?

Over the last 20 years and especially over the last 10 years, there has been a consistent theme of moderate growth and low inflation which has created an environment that is incredibly rewarding to passively hold stocks and bonds. This has been facilitated by a number of other variables such as globalization, the strength of the US dollar due to its reserve status, accommodative monetary policy by the FED, and demographic differentials between the US and the rest of the world.

This has created an environment where bonds have had a multidecade bull market as interest rates hit the zero bound. In turn, this has supported stock indices in the US which are primarily concentrated in technology stocks that benefit tremendously from falling interest rates.

The whole point isn’t that the world is going to fall apart but that a lot of the tailwinds generating positive returns in portfolios over the last 20 years are decreasing. During the last 20 years, active management in markets declined and passive strategies took the front seat in AUM allocations. The logic behind this was, if a 60/40 portfolio outperforms most active managers, then why would I pay a management fee? This makes complete sense until we have years like 2022 where both stocks and bonds sell off in tandem.

The main point is that due to the decreasing tailwinds which generated positive returns over the past 20 years, the ability to adapt and actively manage portfolio exposure will likely carry greater importance in the future.

On a more fundamental level, having a wealth management process as noted above, and having a laboratory-like research business that provides the ability to make decisions and adapt is a necessity regardless of the tailwinds or market environment.

This is where I spend the majority of my time. As noted I noted in the “About” section of this Substack, I consume a lot of information for the purpose of running a laboratory-like business that generates durable sources of returns. In my mind, this process is less about markets and more about how life works in general. I could very easily transition this skill set to any domain.

What does this tangibly look like?

When we approach any complex system there are several things we want to do:

• First, we want to identify all the variables and moving parts

• Second, we want to identify the causal mechanics of the system and the sensitivity of all the variables to those mechanics

• Third, we want to quantify these into a testable framework in order to have an informational feedback mechanism that tells us when we are right or wrong.

• Fourth, we want to identify what is the best course of action in a specific regime or the best decisions given how the system functions.

When we approach the US economy and markets, there are three major variables that drive assets: growth, inflation, and liquidity.

A great resource monitoring growth, inflation and liquidity is Prometheus Research. Here is an example of the backtest from Prometheus of all assets across the various collocation of regimes:

The challenge is correctly anticipating inflection points and timing trades correctly as these regimes unfold. Asset class returns never occur in a linear fashion which means we usually see negative and positive returns compressed into specific periods of time. This is why market timing is important regardless if you are a long-term investor or a shorter-term trader.

Wealth management is about timing the asset and liabilities you need to manage for your future. We also need to time asset markets so that we can preserve and/or grow wealth for that future liability. When we enter periods of time with a higher frequency of growth, inflation and liquidity shocks, there are likely to be more market timing decisions that need to be made for extracting positive returns and sidestepping negative returns. This is why active management and passive management can outperform each other during different periods of time.

2022 marked a signal to passive investors that the next decade is unlikely to be identical to the previous. This is part of the reason why I will be writing here consistently.

Conclusion:

I am primarily focused on systematically quantifying growth, inflation, and liquidity as it dynamically changes through the cycle, as well as the sensitivity of all assets to those changes. I then have tools/models for implementing market timing, execution, and risk management measures to correctly generate returns and minimize losses.

I will be sharing these insights and specific trade write-ups as well. Here is an example of one I recently wrote: https://drive.google.com/file/d/1x_3onfYMZxNTgmxLvtSE3YvLuibTY9go/view?usp=share_link

How these insights connect to each person’s situation will be unique since everyone has different goals. However, I wanted to have the first publication provide my framework for how I think about the world. I think this is important because it contextualizes the WHY behind things. This is why I don’t start by talking about which way I think the S&P500 is going. The process by which you execute decisions is just as important as the information you get to make those decisions.

Final thought: There are a number of people who will be reading this with different degrees of participation in the market. Feel free to share any feedback or if there is a specific topic you would like me to speak to.

Thanks