A Framework For Successful Revolution Investing And Avoiding Black Swans
Before we jump in, and more on this below: I’m taking most of the rest of the profits on these call options that we bought a few weeks ago when the markets were near those recent lows that seem so far away now… Now, onto the column.
It’s very important to have a baseline outlook for the economy and the markets. Part of that is thinking through the various major geopolitical, geo-economic and technological Revolutions (“hooks”) that are already or very likely to happen at some point during our lifetimes.
In that vein, right before I launched my hedge fund — about 1500 days ago — I created a spreadsheet that had the following columns:
| Investment/Regulatory/Policy/Institutional Hook | Catalyst | Timing | Best way to play it | Downside risk to the trade | Potential upside of the trade | Systemic Threat? |
The idea is to think through a framework so we know what our strategies for investing are before we put money to work and so that we might not be completely blindsided by so-called Black Swan Events. You’ll notice in the rows that are filled out in this spreadsheet four years and one month ago are much of the same themes that I’ve written about for the last four years. But I wasn’t on board with The Space Revolution yet, so it’s not in there.
Here are some of the rows in that spreadsheet that are filled out as I thought them through four years ago:
| Investment/Regulatory/Policy/Instutitional Hook | Catalyst | Timing | Best way to play it | Downside risk to the trade | Potential upside of the trade | Systemic Threat? |
| Long-term Revolution Investing stocks | Genetics/AI/Cannabis/Cloud/Driverless, etc | Ever ongoing | Buy near bottom of down cycles, trade around core positions, etc | 10-20% in a terrible year | 15-25% per year average long-term | No |
| Betting against small-cap fraudulent/silly/hyped stocks | Fraudulent penny stocks and IPOs in crytpos/AI/Cannabis/whatever’s hot | Mostly in bull markets | Short the stock and/or buy puts dated 3-12 months out | Maybe 1-3% of portfolio per trade incl stock and options | 20-50% per year until the fund grows to over $500MM | No |
| Crowdfunding | Regulatory changes | 1 year out | Buy vetted co’s at Republic.co | Maybe 1% of the fund per year total | 20-50% per year until the fund grows over $100MM | No |
| Cryptocurrencies/tokens | ? | 3-5 years out | Not sure yet | 20-50% per year | Yes? | |
| The Great Trade War creates supply chain shake up | Trump’s tarriffs | Present-3 years out | Not sure yet | No | ||
| Federal Reserve shifts to expansionary | Low inflation or a bear market | Present-3 years out | Ride the bull | No | ||
| Federal Reserve shifts to contractionary | Inflation finally breaks out and/or asset bubbles get too big | 7-10 years out | Defend capital/find shorts | No | ||
| $20 Trillion Debt on balance and another $60 billion off balance | Much higher interest rates | 3-30 years out | Not sure yet | Yes | ||
| Petrodollar collapses | ?/Cryptocrurrencies? | 20-30 years out | Bitcoin/Find other virtuous cryptos? | No |
You’ll also notice that I overestimated how long it would take some/most of those “hooks” to play out. The Covid Crisis and all the extreme monetary and fiscal responses from around the world helped accelerate the timing but there’s also that whole ever accelerating Kurtzweil Rate Of Change impact from global instant information and money movements and the constant acceleration of innovation too. I’m the one who constantly thinks about the Kurtzweil Rate Of Change impact but even I underestimated its impact on much of our society, economy and markets four years ago.
Bryce and I are hard at work on creating a new set of “hooks” and filling out the columns for those next set of hooks that we should be paying attention to and when we should be looking for them. I’ll share that in the next couple weeks as we finish it up, so stay tuned for that.
In the meantime, I’m taking most of the rest of the profits on these call options that we bought a few weeks ago when the markets were near those recent lows that seem so far away now. Remember that just 11 days ago I wrote: “I’m taking some profits on about half of my call options across the board and reducing my long exposure a little bit here as the big rally in the markets has been everything I’d expected it to be and more. Not sure the move is over, but it’s never good to be greedy.”
Well, the move sure continued higher and, yes, I’m taking much of that extra long exposure off the wall as this market has continued this move higher here near-term.
It wasn’t but just 33 days ago that I wrote: “I’m selling lots of puts that I have on as hedges in the hedge fund and am doing some nibbling on the long side there in AMZN, SHOP, UBER, INTC and a few calls on QCOM, NVDA, META, and U. Mostly buying calls dated out 4-8 weeks, slightly out of the money.”
Those names, without exception are up huge since then and it’s been a great run, but I’m taking most of those options off the table now. Let’s just catch our breath a little bit.
We’ll do this week’s Live Q&A Chat at 11am ET in the chat room on TradingWithCody.com or just hit reply to this email and we’ll include your question and my answer in the transcript. Be there or be square.
