We approach this problem differently than most because of our core belief that: “Offense wins games. Defense wins championships.”
We believe that building a diversified portfolio combining defensive-minded strategies, such as long volatility and trend, with offensive-minded strategies, such as stocks and bonds, provides the best opportunity for long-term capital growth while reducing drawdowns in the interim.
We view true diversification as the ability to accomplish the two things most investors care about in their portfolios:
We believe building a team of diversified strategies with different return drivers is the best way to facilitate these dual objectives.
We take a multi-strategy, multi-asset approach to offer broader and more effective diversification across both offensive and defensive strategies.
Taylor has spent the last decade researching, consulting and speaking about how individuals and institutions can be more resilient.
This experience showed the need to create an investment strategy designed to perform across growth, decline, and inflationary regimes.
Taylor primarily oversees the day-to-day operations and investor relations component of the business.
His writing has been featured in dozens of media outlets including NBC, Inc, and The Financial Times.
A former Brazilian Super Bowl champion, Taylor lives in Austin, TX.
After living through 2008 as a commercial real estate developer, Jason became focused on how investors could better manage their risk. He spent the following decade consulting on portfolio construction and building bespoke long volatility strategies for family offices and high-net-worth individuals.
This experience in cross-asset class trading spotlighted the need to create a portfolio that combined both offensive and defensive strategies.
Jason primarily oversees the investment strategy and manager selection.
A former D1 soccer player and IMG academy graduate, Jason currently resides in Napa Valley, California.
How can we build more robust, or even antifragile, portfolios?
For the past decade, we’ve been researching and working on answers to that question.
The journey began in the depths of the 2008 global financial crisis. We saw how important it was for investors to have tools to construct more robust portfolios.
The promise of diversification has always been to improve your risk-adjusted returns and ultimately generate higher returns without taking more risk.
However, 2008 and subsequent events suggested to us that traditional forms of diversification were no longer effective. We needed to build more robust portfolios capable of weathering periods of significant equity market declines.
In 2008, a seemingly “diversified” portfolio of U.S. stocks, international stocks, real estate, commodities, and high yield bonds turned out not to be so diversified.
Our search for better answers led us to study many portfolios and asset allocation strategies.
The one that stuck out was the work of a little-known financial advisor from the 1970s, Mr. Harry Browne.
From his Franklin, TN office, Browne had a key insight about portfolio construction and effective diversification.
He identified macroeconomic environments: Growth, Recession, Inflation, and Deflation.
Browne believed any period of recorded economic history in any country in the world can be fit into one or a combination of these four environments.
The most common portfolio construction is a stock and bond focused approach such as the 60% stock /40% bond portfolio. However, stock and bond focused portfolios only do well in two of the four quadrants. Stocks tend to do well in periods of growth and bonds tend to do well in periods of growth with low inflation. It’s like a sports team that is all offense.
It can go through periods such as 1980-1999 or 2010-2019 where it puts up a lot of points. However, when the offense has a couple of off days, the championship hopes go out the window.
Most investors alive today, particularly U.S. investors, have invested overwhelmingly in periods where stocks and bonds performed exceedingly well and so there is a strong bias towards those offensive assets.
We have a different philosophy, inspired by Browne’s work: Offense wins games, but defense wins championships. Offense can work great in the short term for a single game, but you need defense to win in the long run. In the same way, we believe a portfolio requires both offensive assets like stocks and bonds, but also defensive assets like cash and gold.
However, traditional portfolio diversification is still overwhelmingly focused on offensive assets: stocks, bonds, REITs, private equity, and venture capital.
While these all have their role in a portfolio, to effectively compound wealth over the long run while minimizing drawdowns, we believe these offensive assets must be paired with defensive assets.
While Cash and Gold may have been the best tools available to Browne, we felt the defensive components of the portfolio could be improved.
The biggest hole we saw in the traditional Permanent Portfolio was a sharp sell-off leading into a recession. At the time he created his portfolio, using 25% in cash to help dampen the losses in other parts of the portfolio was the best option Browne had.
However, with the advent and increasing accessibility of volatility trading strategies in the 2010s, we came to believe that utilizing a long volatility strategy instead of just cash could better offset losses elsewhere in the portfolio in the event of a sharp sell-off, improving the risk-adjusted returns.
Holding cash dampens the drawdowns in the rest of the portfolio, but long volatility strategies seek to not just dampen the drawdown but to generate profits in a sharp sell-off so that gains can be rebalanced into the other parts of the portfolio at the opportune moment.
The challenge for us was that these strategies were not readily accessible to non-institutional investors. In 2018, we set out to solve that problem. We identified and spoke with dozens of long volatility managers and figured out a structure that would allow us to invest in a diversified ensemble of long volatility managers.
As we spoke with more and more people, we realized that we were not the only people looking to solve this problem and decided to launch our long volatility strategy in 2020.
The second hole we saw in Browne’s approach was the strong reliance on gold for protection against inflation or an extended depression. Volatility strategies can do well in the first leg down in markets where you have a sharp sell-off and volatility spikes. But, they don’t tend to do as well in an extended recession and don’t necessarily have any relationship to inflationary environments.
While gold performed exceedingly well in the 1970s inflationary environment, its longer history is more checkered. We saw that incorporating trend-following strategies on commodity, stock, and bond markets could help to cover these possibilities.
Based on our research, we came to believe that these substitutions of long volatility strategies for cash and trend-following strategies for gold were substantial improvements. We believe that pairing these defensive strategies with offers substantial benefit.
However, we saw that there was a way to improve even further. We believed that investors would benefit from layered diversification. Diversification across the four macro quadrants is a good starting point, but even better is diversification within each of those quadrants.
The Cockroach Portfolio utilizes global stocks, global bonds, four different volatility strategies and three different trend approaches in an attempt to provide the most robust portfolio possible.
Having spent over a decade thinking about and working on how to build the best long-term portfolios, we believe that the Cockroach Portfolio is the best approach for investors seeking to optimize their risk-adjusted returns
We began working on this portfolio in 2018, originally under the name Ataraxia, a greek word meaning “calmness untroubled by mental or emotional disquiet.” (We gave up on the name when no one could spell it and few could pronounce it, though we never gave up on the sentiment.)
Our goal has always been to construct a portfolio where we could hold our savings without constantly worrying while still compounding capital efficiently.
We developed our Long Volatility Strategy in April of 2020 because we felt it was an important component of a well-diversified portfolio that could effectively compound wealth, and, from our own experience, it was very difficult for non-institutional investors to access active long volatility managers.
However, our core belief has always been that long volatility is only a part of a broader portfolio. We developed our Long Volatility and Stocks Strategy in July 2020 to offer a more balanced and diversified approach that included both long volatility and stocks in a single product.
In 2021, we launched our Cockroach Strategy as what we see as a total portfolio solution.
Cockroaches aren’t cuddly, but they do two things well that we also want out of our portfolios: they’re really hard to kill and they compound fast.
If you’re interested in investing, you can learn more about our Cockroach Strategy on our website.
We also offer a suite of defensive investment strategies as separate investments. These strategies are part of the holistic Cockroach Portfolio and are intended as diversifiers to be combined with existing offensive assets in an investor’s portfolio such as stocks, bonds, and private equity.
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