Investors: Consider the ‘U’ Portfolio


At the start of 2019, Profit Watch jammed its stake in the ground and flew its tattered bull flag.

We sent our rallying cry into the wind: ‘Buy the dip!’

I even suggested the Australian market could go into all-time highs in 2019. Sound easy? It wasn’t. I felt half mad writing it at the time.

It hasn’t happened yet, but we’re mighty close.

Look at the front page of Saturday’s Australian Financial Review

AFR Weekend Front page with story of The Big Bounce, ASX best six months since 1992.
Source: The Australian Financial Review

There were few bulls calling for a big rally back in December…that I can recall, anyway.

I ate my own cooking here. I’m ‘all in’ on stocks in my super fund.

I only point it out to highlight one thing.

The markets often throw up very compelling risk versus reward opportunities. You have to jump on them when you can.

You can never guarantee you will be right…but if the potential payoff is there, it’s worth a shot.

This is going to become vital with the cash rate taking deposit rates towards nothing.

I’m going to show you another headline.

This comes from the Financial Times last week…

Financial Times newspaper with storpy on Crypto Revival
Source: Financial Times

You can see bitcoin lifting off the floor.

In April, I wrote the following to my paid subscribers:

I expect Facebook Coin to be part of the revival in the cryptocurrency market. That means this month’s Small Cap Alpha is slightly different. I’m going to recommend you buy bitcoin (BTC).

It’s currently up 114% in about two months.

Here’s the gist: You have to try and catch these moves BEFORE they’re in the headlines.

Unconventional ideas are the most valuable

There’s no advantage when an idea or viewpoint becomes mainstream and accepted. Hence the old saying: ‘It’s priced in.’

Indeed, any good trader usually takes these front pages as a signal to go the other way, in the short term at least.

Now, it’s possible both bitcoin and the Aussie market keep trending up from here. Indeed, I happen to think both will.

But the risk versus reward ratio is a little less favourable than it was.

That’s not the only problem…

One thing that worries me about the market now is everyone chasing the same stocks for dividend yields.

I’m going to suggest something a little different.

It’s the idea of a ‘U’ portfolio.

What is it?

Read on…

I got the idea from a man called Satyajit Das. He’s a former trader and author. He seems to have receded slightly from commentary in recent times.

But I saw him present at a conference in 2012. His main point at the time was that the world is saturated in debt and confined to low growth.

He called his solution to this the ‘U’ portfolio.

It was an idea to keep 90% of your money (as I recall it) in assets designed to preserve capital. Think deposits and bonds.

Then Das suggested buying deep ‘out of the money’ options on both sides of the market.

So if the market went way up or way down, one of those options would soar in value.

If the market stayed roughly where it was, the options would expire worthless.

But you could wear that because their cost was small in the context of your whole portfolio…and you would preserve your core capital.  

It’s a useful idea for today’s environment.

Small stakes, big payoffs 

I think of bitcoin — and other cryptos — like this: You’re chasing the moonshot here. A modest allocation could pay off in a big way.

But there’s one asset class that also fits this bill. 

It’s the small-cap sector. You can get some terrific rides here.

The proof is right in front of us. The best performing stock of the last 12 months is one of them.

It’s a company called Nearmap [ASX:NEA]. It’s up 238%.

I missed this one. I’m still kicking myself. But that’s exactly the kind of return you’re hunting for in the small-cap sector.

And there’s always opportunities like this. In 2016, it was lithium stocks. In 2017, gold stocks ran (and are doing it again in 2019). I could give examples for ages.

Putting a small stake in some of these ideas — relative to your overall capital — is one way to try and beef up your returns when there’s no real shelter in fixed income anymore.

Don’t be put off by all the blather about the Australian economy, either.

Hundreds of stocks have nothing to do with the Aussie economy…or, like Nearmap, have one foot here and another stepping into the huge markets of the US or Europe.

These businesses are some of the best to find. But you probably won’t hear about them unless you have a guy like me looking for you.

More this week!

Best wishes,

Callum Newman,
Editor, Profit Watch